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SOFR Futures and Options is the practical guide through the maze of the transition from LIBOR. In the first section, it provides an in-depth explanation of the concepts involved: The repo market and the construction of SOFR SOFR-based lending markets and the term rate The secured-unsecured basis SOFR futures and options and their spread contracts Margin and convexity Applying these insights, the second section offers detailed worked-through examples of hedging loans, swaps, bonds, and floors with SOFR futures and options, supported by interactive spreadsheets accessible on the web. The gold standard resource for professionals working at financial institutions, SOFR Futures and Options also belongs in the libraries of students of finance and business, as well as those preparing for the Chartered Financial Analyst exam. Title Page Copyright Foreword A LITTLE BIT OF HISTORY A REVOLUTION IN FINANCE ALL THE BEST Introduction EURODOLLARS EURODOLLAR FUTURES LIBOR THE GREAT FINANCIAL CRISIS THE LIBOR RIGGING SCANDAL SOFR AND REPO MARKETS SOFR FUTURES AND OPTIONS: TOPICS AND STRUCTURE OF THIS BOOK IMPLICATIONS OF SOFR FOR MARKET ANALYSIS REMAINING HURDLES IN THE TRANSITION FROM LIBOR TO SOFR THE TRANSITION CONTINUES NOTES SECTION ONE: Concepts CHAPTER 1: SOFR THE REPO MARKET SOFR: DEFINITIONS AND FEATURES CALCULATING A REFERENCE REPO RATE ORIGIN OF REPO RATES USED FOR SOFR CALCULATION SOFR VERSUS FED FUNDS SOFR SPIKES AND THE SRF BENEFITS AND (POTENTIAL) PROBLEMS OF SOFR NOTES CHAPTER 2: SOFR Futures 3M SOFR FUTURES: CONVENTIONS 3M SOFR FUTURES AS MARKET PRICES FOR CONSECUTIVE 3M FORWARD SOFR 3M SOFR FUTURES: STRIPS 3M SOFR FUTURES: ROLLS 1M SOFR FUTURES: CONVENTIONS 1M VERSUS 3M SOFR FUTURES 1M AND 3M SOFR FUTURES: LIQUIDITY 1M AND 3M SOFR FUTURES: ASSESSING THE EFFECT OF FOMC MEETINGS PRICING AND HEDGING WITH SOFR FUTURES: GENERAL CONSIDERATIONS EFFECT OF PROCESS SELECTION ON THE PRICING OF SOFR FUTURES EXAMPLE FOR HEDGING A SOFR TERM RATE WITH SOFR FUTURES VIA A JUMP PROCESS NOTES CHAPTER 3: SOFR Lending Markets and the Term Rate CONVENTIONS OF SOFR-BASED LENDING MARKETS STATUS OF SOFR-BASED LENDING MARKETS SIMPLE AVERAGING VERSUS DAILY COMPOUNDING THE SOFR INDEX TERM RATE THE MODEL TRANSLATING SOFR FUTURE PRICES IN SOFR TERM RATES CRITICISM OF THE CME TERM RATE TWO SCENARIOS FOR THE FURTHER EVOLUTION OF THE TENSION AND HENCE THE TERM RATE NOTES CHAPTER 4: SOFR Spread Futures and the Basis SOFR FUTURES IN THE STIR UNIVERSE DRIVING FORCES OF SPREADS IN THE STIR UNIVERSE CME'S SPREAD CONTRACTS DRIVING FACTORS OF THE SECURED–UNSECURED BASIS A MODEL FOR THE SECURED–UNSECURED BASIS, LINKING IT WITH OTHER BASES (CCBS) FIRST APPLICATION OF THIS MODEL: PRICING SPREAD FUTURES SECOND APPLICATION OF THIS MODEL: REPLACING THE CCBS WITH SPREAD FUTURES IN SOME RV TRADES THIRD APPLICATION OF THIS MODEL: NEW RV RELATIONSHIP THE CCBS AND THE MODEL AFTER THE END OF LIBOR REMAINING PRODUCTS WITH EXPOSURE TO THE BASIS AFTER THE END OF LIBOR SWAPS WITH SOFR AS FLOATING LEG AND ASSET SWAPS AFTER THE END OF LIBOR HEDGING SOFR-BASED SWAPS AND GOVERNMENT BONDS WITH SOFR FUTURES NOTES CHAPTER 5: SOFR Future Options OPTIONS ON 3M SOFR FUTURES: PRODUCT SUITE AND SPECIFICATIONS OVERVIEW OF GENERAL VOLATILITY ANALYSIS DISTRIBUTION OF REALIZED VOLATILITY OVER THE SECURED YIELD CURVE CURRENT IMPLIED VERSUS HISTORICAL REALIZED VOLATILITY OPTIONS ON SOFR FUTURES VERSUS OPTIONS ON ED FUTURES OPTIONS ON 1M SOFR FUTURES: PRODUCT SUITE AND SPECIFICATIONS OVERVIEW OF AVAILABLE PRICING MODELS FOR ASIAN OPTIONS A POSSIBLE ROAD MAP TOWARD PRICING OPTIONS ON SOFR FUTURES DURING THE REFERENCE PERIOD IMPACT OF PROCESS SELECTION ON THE PRICING OF OPTIONS ON SOFR FUTURES NOTES CHAPTER 6: Pricing Biases and SOFR Curve Building BIASES IN EURODOLLAR FUTURES PRICES NONLINEARITIES RESULTING FROM CONTRACT DEFINITIONS BIASES IN SOFR FUTURES BUILDING A SOFR SWAP CURVE FROM SOFR FUTURES NOTE SECTION TWO: Use Cases CHAPTER 7: Simple Examples of Hedging with SOFR Futures EXAMPLE 1: CORPORATE TREASURER CONVERTING FLOATING RATE EXPOSURE TO FIXED EXAMPLE 2: LOCKING IN AN INTEREST RATE WITH MISMATCHED DATES EXAMPLE 3: USING ONE-MONTH SOFR FUTURES AS A HEDGING ALTERNATIVE LESSONS TO BE LEARNED FROM THESE THREE SIMPLE EXAMPLES NOTES CHAPTER 8: Hedging the CME Term SOFR Rate THE TERM SOFR METHODOLOGY THE CME TERM SOFR OBJECTIVE FUNCTION OBTAINING FUTURES PRICES TO USE AS INPUTS TO THE TERM SOFR MODEL HEDGING TERM SOFR EXPOSURE A PRECISE APPROACH TO HEDGING CME TERM SOFR EXPOSURE PRACTICAL CONSIDERATIONS NOTES CHAPTER 9: Hedging Swaps and Bonds with SOFR Futures TREASURIES VERSUS SOFR FUTURES STRIPS HEDGING SOFR SWAPS WITH SOFR FUTURES HEDGING TREASURIES WITH SOFR FUTURES NOTES CHAPTER 10: Hedging Caps and Floors with SOFR Futures Options HEDGING WITH OPTIONS ON 3M SOFR FUTURES BEFORE THEIR REFERENCE QUARTER STARTS MANAGING THE HEDGE DURING THE REFERENCE QUARTER BASIC REPLICATION STRATEGIES OF CAPS AND FLOORS WITH 1M FUTURE OPTIONS DEALING WITH DAILY FLOORS NOTES Bibliography Index End User License Agreement "By many measures, the Eurodollar futures and options complex has been the most successful in the world. Since its introduction in 1981, the tremendous volume and open interest of the Eurodollar complex have made the Chicago Mercantile Exchange the envy of other exchanges, from São Paulo to Singapore. But global financial regulators are actively retiring LIBOR, the index on which the Eurodollar contract is based, in favor of SOFR, the secured overnight financing rate. Not surprisingly, the CME has introduced a SOFR futures contract based on this rate. In fact, the CME has introduced two futures contracts--a three-month contact, and a one-month contract--along with options on these futures. The SOFR index has a number of key differences from the LIBOR index, and these differences have material implications for market participants, and SOFR Futures and Options will provide users of these contracts with the information they need to use these products with confidence"-- Provided by publisher