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Questions tagged [risk-free-rate]

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6 votes
8 answers
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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 ...
Big_Fish1994's user avatar
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 ...
Jan Stuller's user avatar
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5 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 ...
Jan Stuller's user avatar
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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 ...
Jan Stuller's user avatar
  • 6,178
4 votes
1 answer
443 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 ...
Jan Stuller's user avatar
  • 6,178
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 ...
Daniel's user avatar
  • 377
2 votes
2 answers
838 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 '...
sasa's user avatar
  • 23
2 votes
0 answers
96 views

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 ...
Dom's user avatar
  • 2,167
2 votes
0 answers
165 views

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 ...
pyCthon's user avatar
  • 2,121
2 votes
0 answers
390 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 ...
Rich.G's user avatar
  • 21
1 vote
2 answers
186 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 ...
humanoid's user avatar
1 vote
1 answer
874 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 ...
Teemo's user avatar
  • 11
1 vote
0 answers
179 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 ...
StatistikDude's user avatar
0 votes
1 answer
490 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 ...
SSC Fan's user avatar
  • 53
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) + \...
Barbab's user avatar
  • 171
0 votes
1 answer
296 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
stackoverflower's user avatar
0 votes
0 answers
177 views

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: ...
Leonardo Cruciani's user avatar
0 votes
0 answers
65 views

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 ...
Ειρήνη Ιωάννου's user avatar
0 votes
0 answers
93 views

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 ...
Sam0512's user avatar
0 votes
2 answers
99 views

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 ...
Galadon's user avatar