With the imminent transition from LIBOR to SOFR next year, what are the data points practitioners are using to construct a yield curve? Also, since LIBOR implicitly took into account credit risk of the counterparty due to the fact that this is an interbank rate, how will derivatives transactions incorporate credit risk?
Like any curve construction, you would use the prices of traded assets to construct the curves. For example, in the standard LIBOR, people use FRA, futures, and swaps referencing LIBOR to construct the LIBOR curve ( say 3 months or 6 months). For SOFR, you can use SOFR futures and swaps, so don’t think there is much difference, the problem at the moment is liquidity!