Ahead of the curve: how traders profited from Libor fallbacks
Market second-guesses spread for new risk-free rate, spicing up Libor-Sonia basis market
When a near-final version of the fallback methodology for derivatives contracts referencing Libor was published last November, the market response was immediate: the sterling basis moved 12%, or 3 basis points.
The market is expected to move again – potentially by up to 5bp – when the final fallback language is released in a few weeks’ time, spelling out, for instance, the lookback period for calculating spread adjustments.
“If it’s a five-year lookback, I have a sheet that can calculate the
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