Suppose that OIS rates for all maturities are 2.5% and swap rates for all maturities are 3%. Which of the following is true?
A. Forward LIBOR rates are greater when OIS discounting is used than when LIBOR discounting is used
B. Forward LIBOR rates are less when OIS discounting is used than when LIBOR discounting is used
C. Forward LIBOR rates are the same for both OIS discounting and LIBOR discounting
D. Either A or B can be true
C
When the yield curves are flat, all forward LIBOR rates are 3% regardless of whether OIS or LIBOR discounting is used. This is because, when all forward LIBOR rates equal 3%, all exchanges on all swaps are worth zero regardless of the discount rate used.
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