Abstract
With the near-default of Bear Stearns in 2007, Equation (1.1) broke down, as Figure 2.1 shows: the curve starts to move away from 0 in early 2007 and jumps to 1.6% with Lehman’s default. While the difference has reduced significantly, it cannot be assumed to be zero anymore. Therefore, the replication argument fails.
Keywords
Credit Risk Lending Rate Swap Rate Perfect Collateralization Overnight Rate
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Copyright information
© Roland Lichters, Roland Stamm, Donal Gallagher 2015