2
$\begingroup$

Many year ago, I worked on the pricing of IR products (Floating rate swap, CMS swap, Cap, Floor,...)

Libor rates are now replaced by SOFR rate. I would like to know

  • What are the new IR products (Floating rate swap, CMS swap, Cap, Floor,...) after the replacement of Libor rates by SOFR rate? And how are these new IR products priced?

I would be grateful if you could give me some good references (papers, books,...).

$\endgroup$
1
  • $\begingroup$ @Hasek Thank you for the very helpful answser. I'll read the paper you suggested. The link answer my two first questions (are these existing mathematical IR models still used for pricing the new SOFR rate? are there any new models invented for the SOFR rate recently?), so I deleted them and keep the 3rd question. I'm curious to know, for example, how the (Libor) floating rate bond will be replaced (by another new kind of (SOFR?) floating rate bond). $\endgroup$
    – NN2
    May 21, 2023 at 20:24

1 Answer 1

3
$\begingroup$

The reference you want is https://www.newyorkfed.org/arrc The conversion to SOFR from LIBOR was well worked and well publicised, concerning the transition issues and what were the ultimate recommendations.

For FRNs, a variety of possibilities existed. The recommendations were a lookback period of 'x' days with observation shift. This means that coupon periods on FRNs rely on the published, compounded SOFR fixings within a period, but lagged by 'x' days so that cashflows can be scheduled and settled.

In the IRS space the market now trades SOFR IRS on an Annual/Annual Act360/Act360 structure with no lookback but with a payment lag of 2 business days to ensure operational cashflow settlement.

$\endgroup$
1
  • $\begingroup$ It’s interesting, upvoted! Thank you. $\endgroup$
    – NN2
    May 21, 2023 at 21:38

Not the answer you're looking for? Browse other questions tagged or ask your own question.