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8

The market is using SOFR discounting for all sorts of quotations already (not FF). For example, swaption vol is quoted with SOFR discounting, CME and LCH moved to SOFR PAI and discounting on Oct. 16 2020 on new AND legacy swaps. For EUR cleared, major CCPs did this since July 27 2020. The market switched to discounting with the relevant RFR rates on the ...


7

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, the floating rate of the OIS swap would be based on the EFFR rate, whilst the fixed leg would be the normal fixed leg we are used to seeing in swaps. So the ...


6

Well, OIS is actually a style of swap, based on overnight rates. It could have a Fed Funds or a SOFR underlying rate, or anything else. Up until recently , it was assumed in common parlance that OIS meant Fed Funds, but we do hear nowadays of OIS style SOFR swaps.


6

The 3M futures are worth \$2500 per index point and the 1M futures are worth \$4167 per index point. The index is $$P = 100 - R$$ where R is the compounded SOFR (annualized) over the reference period. The contracts don't have a face value (they are defined in terms of the number of dollars per index point) but you can think of the 3M futures as having a \...


5

At this point liquidity in SOFR is provided by a set of futures contracts in the very short end of the curve , and then through Libor -SOFR basis swaps which are reasonably liquid up to around 5years, although quotations exist up to 30yrs. You can build a curve using these basis swaps. Currently , the SOFR curve differs from the Fed Funds curve by only a ...


5

RFR (risk free rate) is the current acronym ISDA, central banks and regulators are pursuing to signify and politicise the transition from IBOR, which has been dogged by rigging scandals. OIS (overnight index swap) is the acronym that has been associated with an unsecured overnight interbank cash lending rate fixing (OIS fixing) (with different calculation ...


4

SOFR was never meant to take USD LIBOR's role, as USD LIBOR reflects unsecured funding (and is credit sensitive). An index like BSBY, on the other hand, can. BoA just started issuing FRNs linked to it. A BSBY-SOFR basis swap was also struck a month ago.


4

I will try to make a more general suggestion that doesn't depend on SOFR, EONIA, LIBOR, cross-currency basis, etc, but applies all all linear interest rates products. Sorry if I may be digressing. You have a number of observable instruments that you use to build your interest rate (multi)curves. In general, these are the hedging instruments that you would ...


4

I think the question was about dual curve stripping. As much as I know, the market is using SOFR discounting for all sorts of quotations now. For example, swaption vol is quoted with SOFR discounting, CME and LCH moved to SOFR PAI and discounting on Oct. 16 2020 on new AND legacy swaps. For EUR cleared, major CCPs did this since July 27 2020. The market ...


3

I believe that this recent paper by Andrei Lyashenko and Fabio Mercurio is going to help you! For me it was completely amazing. It seems that we can just extend the Libor Market Model in a "simple" manner to cope with the new RFR because we can define an extended numeraire $P(t, T)$ for $t > T$ that recovers Ibor-like properties, such as the ...


3

Unfortunately, I cannot provide a definite answer. In the major currencies, the risk free rate working groups (US:ARRC, UK:RFRWG and the EU:RFRWG) try to promote new standards for the cash and derivatives markets. Further, there exist recommendations from various industry bodies how to incorporate (lagged) SONIA/SOFR(/ESTR) in new contracts. As an example, ...


3

(Edit 23.11.2020) [Note that my previous derivations were too hasty and had some issues, I will try to amend when time allows. In any case, note that those results were merely model-free: SOFR Futures have convexity adjustments and in practice you will need to specify a model for the forward rates to actually calculate them. Feel free to unmark as "...


3

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 reference is far more liquid at the moment (compare the traded volumes, e.g. https://apps.newyorkfed.org/markets/autorates/fed%20funds vs. https://www.cmegroup....


2

There is (and was at the time of asking) a fairly liquid Outright SOFR OIS market. You also have futures. So there really is not much of a difference. Risk.net analyzed this. I think frequently OIS curves (FF) are constructed without futures but ultimately, instrument selection follows the same considerations for all curve construction exercises.


2

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 ...


2

SOFR is based on the Repo market, which uses SIFMA USD calendar, in which Good Friday is (usually) a holiday. There is (usually, most years) no SOFR published on Good Friday. If SIFMA decides that the the Repo market will be open, even for a few hours, on a Good Friday in some years, then we should expect a SOFR value. In general, holidays should come from a ...


2

"US banks fund themselves via EFFR (Effective Federal Funds Rate), as well as the Secured Overnight Financing Rate (SOFR)" Bank funding is only partly via Fed Funds - there were many important structural changes to that market post-GFC which I believe reduced bank participation in the market. See, for example, this paper: https://www.clevelandfed....


2

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 forward levels versus Euribor 9 month fixings. Whatever you want. You have a mistake above. OIS swaps are not OIS vs Libor. Generally, when someone trades an ...


2

Not sure if this will entirely answer your question, but the key concept here is that the Futures contracts are not priced via some theoretical model, but their price is entirely driven by supply and demand. In turn, the supply and demand reflect the market's expectation about future Libors (or SOFR, in case the underlying is SOFR). Let's say that "...


2

A first step would obvisouly be to check if the curve you built replicates the input instruments. A second step might be to check the forwards to see if there is irregular behaviour around the curve nodes. Look at a plot of daily 3m or 6m forwards which should be smooth. Different interpolation methods will generate diferent results and for this might I ...


2

This has been asked before. I do not think there is any implication from a negative spread (certainly not from the perspective of it being an indicator of perceived credit risk or not). Edit: There is a number of companies who seek to develop and offer a credit sensitive benchmark. ICE's Bank Yield Index Bloomberg's BSBY Index So if you desire an indicator ...


2

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://www.clarusft.com/sofr-futures-and-swaps-feb-2021/ useful details on sofr swaps, from the same blog: https://www.clarusft.com/sofr-swap-nuances/ Specifically: ...


2

Another apology, I won't be able to give a definite answer either but in case of IR swaps I believe the following applies: legacy (i.e. IBOR linked) contracts: the fallback protocol has been launched by ISDA last month and Bloomberg had been selected as fallback spread vendor a while back. In case LIBOR ceases to exist, the fallback rate is the compounded ...


1

SOFR is just an index, like FedFunds or LIBOR, there is no fundamentally different schema for creating a curve. It involves exactly the same considerations you will make as if you are constructing a LIBOR or FFOIS curve, namely: what input prices are available and liquid for calibrating the curve(set). what interpolation scheme is best to employ for each ...


1

I do not think there is any problem. Firstly, you also did not use OIS but LIBOR now, although the "appropriate" risk free rate would be OIS. You also did not compare the two. To address the risk that one or more IBORs are discontinued while market participants continue to have exposure to that rate, counterparties are encouraged to agree to ...


1

SOFR quote is annualized rate.


1

Isn't the "Risk-Free-Rate" (RFR) just a rebranding of LIBOR/EURIBOR, as was? IE these are not "risk-free" so much as interbank, ie the "liquid benchmark for very-short-term very-low-risk". Unless you work in the fixed-income department of an investment bank, the distinction is probably superfluous; so genuinely not worth ...


1

The Fed convened the ARRC (Alternative Reference Rate Committee) in I think 2015 to begin the process of transitioning the financial markets away from Libor. Why? Because Libor had been manipulated , on account of the fact it was based on a poll rather than being sampled from a large , liquid market. The Committee, whose minutes are public, selected SOFR ...


1

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 details on the conventions for each leg] iv) Yes, SOFR/FF basis swaps trade OTC. Or you can trade SOFR futures vs. Fed Funds futures.


1

A CME SOFR futures price in expiration is equal to 1 − R where R is an arithmetic average of observed SOFR rates during the contract month for the one month futures: $$P_{1m} = 1 - R$$ $$R = \frac{1}{N}\sum_{t}r_t$$ and the compounded daily rate during the reference quarter for three-month futures: $$P_{3m} = 1 - R$$ $$R = \frac{360}{N} \left( \prod_{t}( 1 + ...


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