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# Questions tagged [risk-free-rate]

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### How to estimate the change in risk free yields curve based on equity returns?

In the context of stress-testing, what possible methods are there to estimate the change in the risk-free yields curve based on a hypothetical equity return ? I'm trying to estimate the change in ...
0 votes
0 answers
42 views

### Which Discount Rate when Valuing Interest Rate Swaps as Forward Rate Agreements

Quick question about interest rate swaps and Forward Rate Agreements (FRAs). In Hull Chapter 4 (Interest Rates), to value an FRA he constructs the following portfolio: Position 1 (FRA to receive $R_K$ ...
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2 answers
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### Calculating Annualized Sharpe Ratio

I'm calculating the annualized Sharpe Ratio for a strategy with quarterly trades and would appreciate your input on my approach: Trades per year: 4 Average return per trade: 1.6% Standard deviation of ...
1 vote
1 answer
651 views

### Risk free rate for Black and Scholes model: Incorporating inflation?

I am new to quantitative finance and I am trying to create a model for option pricing. Naturally the Black and Scholes equation is front and center for this sort of thing, but that raises the question ...
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1 vote
2 answers
274 views

### How do we price a Non-USD currency FX Forward pair by using cross-currency basis for each currency?

For e.g., when pricing a GBPUSD FX-Forward we build the USD SOFR curve through which we get USD risk-free rate. For the GBP risk-free rate, we use the sum of GBPUSD Basis and SONIA. However, if we ...
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### QuantLib: Getting the present value of a leg of cashflows using a 'risk-free' yield curve

I am trying to evaluate the present value of some cashflows and QuantLib does not return the discount factors that I am expecting. I have a Risk Free (Zero Coupon Bond) Yield curve: ...
6 votes
8 answers
3k views

### Conceptual problem with risk neutrality-What is a 'risk-neutral world', exactly?

I have persistent, deep problems with the concept of 'risk-neutrality'. To make it more precise, let's look at the following explanation taken from a book: "In a world where investors are risk ...
0 votes
1 answer
83 views

### CAPM estimation model alternatives [closed]

Let's take a look at the standard CAPM: $$r_{i} -r_F = \alpha+\beta(r_{MKT}-r_F) + \varepsilon$$ I would like to consider the alternative formulation:  r_{i} = \alpha+\beta(r_{MKT}-r_F) + \...
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6 votes
1 answer
3k views

### Term SOFR rate formula

The following website gives the specifications of the CME Term SOFR reference rates: CME Term SOFR. Point 1 in the link above specifies that the tenors that are currently supported are 1m, 3m, 6m, and ...
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1 vote
1 answer
956 views

### Relationship between risk free rate and credit spread in the Merton model

Based on Merton model of credit risk, I understand that investing in a risky debt is the same as buying a treasury bond and writing a put option on the firm's assets with a strike price equal to the ...
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1 vote
0 answers
202 views

### Are the monthly risk free returns on the French data libary website annualized?

when using the monthly Fama/French 3 Factors .csv file on the French data libary web site, it is possible to see that the left column includes the monthly excess return of the market (Mkt-RF) and the ...
0 votes
1 answer
311 views

### which market instruments are used to strip the SOFR curve under 1 year?

which instruments are used to strip the SOFR curve for the short term of the curve(below 1 y) ? there are no swaps with maturity under 1 year, right? thanks
2 votes
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### Risk Free Rates and Libor

With the demise of Libor, and the arrival of the new risk free rates (RFRs), what are the changes that are occurring with regards to : Valuation of existing derivatives Creation of new derivatives ...
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2 votes
0 answers
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### Which SOFR rate to use and when?

When looking at the actual daily values provided by the SOFR API it's a bit confusing when/where to use which values given they provide two sets of values with different dates, SOFR on a T-1 basis and ...
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4 votes
1 answer
2k views

### Is there a difference between JPY TONA and JPY TONAR?

Wikipedia defines TONAR as "Tokyo Overnight Average Rate". The official Bank of Jappan website mentions TONA, rather than TONAR. I suspect the two, TONAR and TONA, are in fact two terms ...
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0 votes
0 answers
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### Portfolio optimisation

I want to create optimised portfolios in five different countries and calculate if the inclusion of cryptocurrencies or other alternative assets contribute to the diversification. I want to use ...
2 votes
0 answers
407 views

### PV and Risk on a RFR cross currency swap

When pricing a XCCY basis on RFR (assuming USD CSA so under SOFR), for example ESTER versus SOFR (USD leg resettable) : I observed that the PV / Risk and also FX Delta are close to zero. I have been ...
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### How do I have to calculate the risk free rate of my two asset portfolio?

Good afternoon everyone! I have a question regarding the risk free rate of my two asset portfolio. For my course, we have to create a two asset portfolio with the time frame of 2015-2020 with monthly ...
4 votes
1 answer
453 views

### Current liquidity of USD OIS-SOFR Swaps

We have now moved to discounting using OIS-SOFR swaps on cleared products and SOFR products in general have picked up in liquidity since last time this question was asked. I'd therefore like to ...
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3 votes
1 answer
2k views

### Libor transition: Building SOFR discount curve

As I understand that after 2023 the Libor will be discontinued and OI rates like SOFR will ...
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2 votes
2 answers
901 views

### Risk-free interest rate for option pricing from treasury yield curve rates

I am experimenting with an implementation of the Black-Scholes valuation for call options, and ran into the following questions: Black-Scholes pricing requires a risk-free interest rate. What is '...
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5 votes
3 answers
4k views

### The exact mechanics of USD OIS Swaps: SOFR, EFFR & Libor cessation

EDIT 2020-11-17: thank you to @user42108 for the link to OpenGamma conventions PDF in his answer below. The PDF is comprehensive and explains the mechanics of USD OIS Swaps based on Effective Federal ...
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