Case Study:

In April 2016, a large U.S. proprietary trading group in New York, with a significant fixed-income portfolio, was debating what discount rate to use to value the group's interest-rate swap portfolio. The counterparties to these swaps were major banks, and the deals were collateralized. Criticisms about the use of the London interbank offered rate (LIBOR) as a benchmark for valuing these swaps were circulating, and there were reports that LIBOR was being manipulated. There was talk about an alternative, nearly "risk-free" reference rate that could potentially be launched during 2016. Was it time for the trading group to substitute some of its maturing LIBOR-based interest-rate swaps with overnight index swaps?

Compare LIBOR and OIS as benchmark rates that could be used in valuing interest rate swaps?

2-Evaluate whether these rates (LIBOR and OIS) are risk-free?

3-Use the data provided in the case study (in text and tables) to evaluate an interest rate swap based on the two rates? Show all calculations in detail.

Justify the similarity or differences in your valuation.

4-Argue, after reading the case, whether the value of interest rate swaps depends on who the counterparty is and whether the contract is collateralized.