Re: Consultation on Swaptions Impacted by the CCP Discounting Transition to the SOFR (FED)/Consultation on Swaptions Impacted by the CCP Discounting Transition From EONIA to the ESTR (ECB) – Part II on American Swaptions

Abstract

This short essay discusses alternative methodologies that could be considered for handling swaptions whose underlying rates may transition to new risk-free rates before expiration. Note that the methodologies discussed in this response deals only with American-style swaptions. In an earlier response, the author discussed methodologies that could be used to handle European-style swaptions whose underlying rates are billed to transition to new rates before expiration. This analysis assumes that when LIBOR is eventually discontinued, its replacement will also avail a mechanism for constructing a forward-looking term structure of interest rates that market participants can use to price and value securities.