Two curves, one price

The financial crisis multiplied the yield curves used to price interest rate derivatives, making traditional no arbitrage pricing no longer valid. By taking into account the basis adjustment bootstrapped from market basis swaps and using a foreign currency analogy, consistent pricing can be achieved.

The financial crisis has multiplied the yield curves used to price plain vanilla interest rate derivatives, making classic single-curve no-arbitrage relations and pricing formulas no longer valid. Marco Bianchetti shows that no-arbitrage can be recovered by taking into account the basis adjustment bootstrapped from market basis swaps, and that generalised no-arbitrage double-curve pricing formulas can be derived for vanillas by using the foreign currency analogy, including a quanto-like