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9 votes
Accepted

Libor transition: Building SOFR discount curve

OIS Discounting: First note that we already discount using USD OIS rates, but these would be OIS rates constructed from USD OIS Swaps linked to the Effective Federal Funds Rate (EFFR). In other words, ...
Jan Stuller's user avatar
  • 6,098
6 votes

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

I have masters degree in mathematics so the math isn't the problem; but, trying to get my head around financial math, I keep having problems with the concept of 'risk-neutrality'. I suspect you might ...
Ilmari Karonen's user avatar
5 votes

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

A little bit of history. This goes back to the early days when the Black Scholes formula for options was proposed but was still new and somewhat mysterious. It was (and is) widely accepted in Finance ...
nbbo2's user avatar
  • 11.3k
5 votes
Accepted

Term SOFR rate formula

The issue is data ownership and transparency in my view. Whilst OIS-swaps do give a more accurate view of the daily RFR rates that will compound to yield the Term SOFR reference rates, the OIS swaps ...
Attack68's user avatar
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4 votes
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Is there a difference between JPY TONA and JPY TONAR?

This document from Japanese bank Mitsubishi UFJ states they are one and the same rate, see page 3 $-$ my emphasis: TONAR (Tokyo Overnight Average Rate), the RFR for JPY also called TONA, is a pre-...
Daneel Olivaw's user avatar
3 votes
Accepted

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

I initially voted to close this question because I think asking about risk free rates is off topic on quant se (and answered several times). However, I do not think there is a good alternative where ...
AKdemy's user avatar
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3 votes

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

I think a little clarity is needed here. A swap means exchanging A for B. Swaps trade on anything and everything. You can trade IOS/BBA Muni swaps, you can trade a swap linked to the gold ...
JoshK's user avatar
  • 2,613
3 votes
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The exact mechanics of USD OIS Swaps: SOFR, EFFR & Libor cessation

I try to keep your enumerated structure yet address the points you edited into the question: (i) I only know of USD OIS referencing the EFFR and the SOFR (ii) My perception is that EFFR als float leg ...
KevinT's user avatar
  • 645
2 votes

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

Best practice nowadays is to use Fed Funds rates to discount. If you only have Treasury rates , this will be quite close for 0-3 year expirations, since those Treasuries trade quite close to FedFunds....
dm63's user avatar
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2 votes
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Current liquidity of USD OIS-SOFR Swaps

I like this particular blog on rates: https://www.clarusft.com/blog/ Specifically, here is post with some info on SOFR swaps liquidity. There is a section in this post on SOFR volumes by tenor: https:/...
piterbarg's user avatar
  • 940
2 votes

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

One definition of Risk Neutral is where the marginal utility is constant, i.e., u'(x) = c, for all x. A direct consequence of this is that the stochastic discount factor $m$ $(:=\beta\frac{u'(c_{t+1})}...
EYC.CHANG's user avatar
1 vote

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

This is just an extension of @Dimitri 's answer but with numbers to eluciate the concept. when pricing a GBPUSD FX-Forward we build the USD SOFR curve through which we get USD risk-free rate. For the ...
Attack68's user avatar
  • 10.3k
1 vote

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

If your accounting is in ccy$_0$, such as USD or EUR, then you discount the ccy$_1$ leg of the ccy$_1$-ccy$_2$ forward with ccy$_1$ rfr + ccy$_1$-ccy$_0$ cross-currency basis spread and likewise ...
Dimitri Vulis's user avatar
1 vote

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

Forget about risk-neutrality for a second and think about what the definition of a $\mathbb{Q}$-measure. It is some probability measure (not necessary unique) which reproduces market prices such that ...
Freelunch's user avatar
  • 1,086
1 vote
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CAPM estimation model alternatives

I think that if you do a regression with these two equations, the beta will be the same, but what will change is of course the "alpha". In first equation the alpha is the well-know alpha in ...
Roronoa's user avatar
  • 26
1 vote

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

By formula (14) in Merton (1974) the difference of the yield to maturity $R(\tau)$ of the firm's risky debt and the riskless rate $r$ is $$\tag{14} R(\tau)-r=\frac{-1}{\tau}\log\Big\{\Phi[h_2(d,\sigma^...
Kurt G.'s user avatar
  • 2,023
1 vote

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

The trading is being more and more active on 1-month and 3-month SOFR Futures. These quotes should help bridging with liquid swap quotes on mid-term maturities and stripping the appropriate curve. ...
Thomasunny's user avatar
1 vote

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

iii) The OpenGamma piece on IRS market conventions might help. https://quant.opengamma.io/Interest-Rate-Instruments-and-Market-Conventions.pdf [EDIT or USSO2 BGN Curncy DES, for e.g., which provides ...
user42108's user avatar
  • 2,252

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