Page numbers followed by f and t refer to figures and tables, respectively

•  
• Alternative Reference Rates Committee (ARRC), 19, 74, 221
• Arithmetic average, usage, 76, 136, 154
• Arithmetic mean, analytic approximation, 136
• Asian options, 134–137
• Asset swaps, 94, 111–114

•  
• Bank for International Settlement (BIS) risk weighting/capital ratio, 99
• Biases
  • Eurodollar futures prices, 143–145
  • financing bias, 145, 149
  • pricing, 143
  • SOFR futures biases, 149–153
• Black-Scholes approach, 219
  • replication, 136
• Bond futures contract, cheapest-to-deliver (CTD), 113
• Bonds, hedging SOFR futures (usage), 191
• Bootstrapping, 154

•  
• Calls
  • payoff, 140
  • simulated average payoff, 141t
  • simulation, encoding, 140
• Capital ratio, 99
• Caps/floors (hedging)
  • future options, 121
  • hedge control, 213–216
  • instruments, 132
  • options, 213
  • SOFR futures options, usage, 211
• Caps/floors (replication strategies), 216–220
• Cheapest-to-deliver (CTD), 113, 193
• Chicago Mercantile Exchange (CME)
  • CME-cleared SOFR OIS offset, 198
• Chicago Mercantile Exchange (CME)
  • 1M SOFR contracts, simple averaging (usage), 74
  • American-type options, 135
  • optimization implementation, 87
  • spread contracts, 96–98
  • STIR futures, 94f, 97t
• Chicago Mercantile Exchange (CME) Benchmark Administrator (CBA), impact, 189
• Chicago Mercantile Exchange (CME) term rate, 70
  • calculation, application, 61
  • criticism, 85–88
  • jump-only step function, usage, 137
  • pure jump process, usage, 14
• Chicago Mercantile Exchange (CME) term SOFR
  • exposure, hedging, 183–187
  • objective function, 178–181
  • rate, hedging, 177
  • values, hedging, 176
• Compound caps, daily caps (contrast), 223t–224t
• Compounding
  • application, 135
  • impact, 56
  • implementation, 78
  • usage (ISDA formula), 136–137
• Compound term rate, example, 81t
• Constant-maturity term rates, extraction, 87
• Constant maturity Treasury (CMT) yield, 195–196, 196f
• Constant maturity zero (par rates), 43
• Continuous geometric Brownian motion, assumption, 135
• Convexity bias, 143
• Cox, John, 144
• Credit Default Swap (CDS) spreads, 102
• Cross Currency Basis Swap (CCBS), 93, 102–103
  • post-LIBOR relationship, 109–110
  • replacement, spread futures (usage), 105–108
  • spreads, 102
• Cubic splines, usage, 61
• Current implied volatility, historical realized volatility (contrast), 127–130, 128f

•  
• Daily caps, compound caps (contrast), 223t–224t
• Daily compounding, simple averaging (contrast), 80–81
• Daily floors, 220–225
• Daily overnight SOFR values, 150
• Delta hedging, 123, 219
• Discrete processes, 136
• Documents, AARC modelling, 74
• Drift process, 65

•  
• Effective Fed Funds rate (EFFR)
  • SOFR comparison, 25
  • SOFR contrast, 26f
  • SOFR relationship, 101
  • SOFR subtraction, 101f
• Equity cost, 99
• Eurodollar (ED), 1–2
  • contracts
    • options, impact, 121
    • transfer, 94
  • ED-style payout, 146
  • spread contracts, 93
  • SR3 future, contrast, 36–37
  • strips, contract usage, 46
• Eurodollar (ED) futures, 2–3, 198
  • market, concepts (direct transfer), 115
  • options
    • hedging concepts, transfer, 211
    • SOFR futures options (contrast), 130–132
  • prices, impact/biases, 143–145
  • realized volatility, 131–132, 131f
  • usage, 43, 47f
• European-style exercise, 135
• Exotic options, standard options (spread), 138
• exponential splines, usage, 61

•  
• Fallback language, ARRC modelling, 74
• Federal Open Market Committee (FOMC)
  • announcement, schedule, 204
  • meetings, impact, 56–60, 70, 169–170
• Federal Open Market Committee (FOMC) meetings dates, 178–179, 187, 225
  • 1M/3M SOFR futures reference periods, relationship, 58f
  • schedule, 155–156
  • usage, 61
• Federal Reserve (Fed)
  • repo data sharing, 32–33
  • standing repo facility (SRF), impact, 86
• Federal Reserve Economic Data (FRED), 195–196
• Federal Reserve (Fed) policy
  • decisions, impact, 61
  • market expectations, 77
• Federal Reserve (Fed) rate hikes
  • probability, increase, 65
  • speculation, impact, 129
• Fed Funds (FF)
  • contract convention, SR1 contract convention (similarity), 49
  • curve construction, 62–63
  • futures, SR1 futures (spread), 50
  • rates, difference, 95
  • SOFR, contrast, 25–28
  • spread contracts, 93
• Financial crisis, regulations, 100
• Financing bias, 145
  • adjustment, requirement, 154
  • consideration, 149
  • control, 149
  • SOFR futures financing bias, 152–153
• Fitted overnight forward rates, term structure oscillation, 160
• Fitted SOFR curve, 159f
  • regularity condition, inclusion, 160f
• Fitted SOFR values, obtaining, 170
• Fitted stepwise overnight SOFR curve, 171f, 172f
• Fitting, bootstrapping, 154
• Five-month SOFR (5M SOFR) term rate, calculation (example), 45–46
• Fixed rate exposure, floating rate exposure conversion, 166–168
• Floating Rate Note (FRN) cash flows, approximation, 165
• Forward CME term SOFR value, sensitivity (calculation), 187–189
• Forward rate agreement (FRA), 145–149
  • hedge, usage, 147–148, 147f
  • payout, 146
• Forward rate, 10
• Forward SOFR curve, functional forms (differences), 62f
• Forward SOFR values, usage, 77
• Forward-starting CME term SOFR, sensitivity (calculation), 185
• Front-month SOFR contracts, yield calculation, 46–47
• Front-month SOFR futures contracts, front-month ED futures contracts (contrast), 46
• future interest rate (market expectations), SR3 response (decrease), 41
• Future options, usability, 121
• Futures
  • contracts, hedge portfolio construction, 185
  • futures-style margining, 149
  • hedge, process calibration, 69f
  • liquidity, 56
  • swap/Treasury pricing, convergence, 191
• Futures contracts (number)
  • calculation, 167
  • short rate process parameters, difference, 62
• Futures prices
  • obtaining, 182
  • STIR, correlation, 144
• Future strip, usage, 61

•  
• Gamma, usage, 219
• General collateral (GC) rate, 193
• Geometric average, 76, 136–137
• Government bonds
  • asset swaps, unsecured-secured basis, 94
  • hedging, SOFR futures (usage), 114
  • LIBOR-based asset swaps, pricing, 113
  • markets, convergence, 194–195
  • SOFR-based asset swaps, impact, 192–193
• Great Financial Crisis, 3–4
• Greeks, calculation, 215–217

•  
• Hedged instrument, SOFR future strip (date mismatches), 202f
• Hedges
  • calculation, 59, 185t
    • one-month SOFR futures, usage, 173t
  • control, 213–216
  • distribution, usage, 57
  • mismatches, consideration, 210
  • performance, 174
  • ratios, relative sensitivities, 174–175
• Hedging, 182–183, 205–210
  • alternative, 173–174
  • costs, 75, 88–90
  • delta hedging, 123
  • examples, SOFR futures (usage), 165
  • future portfolio, evolution, 209f
  • SOFR futures, usage, 60–63
  • theoretical foundation, 210
• Historical realized volatility, current implied volatility (contrast), 127–130
• Historical SOFR data, usage, 77

•  
• Implied strikes, 219f
• Implied volatility
  • changes, 215–216
  • curve, slope position, 129
  • historical realized volatility, contrast, 127–130
  • realized volatility, contrast, 122–123
• In-arrears
  • floating payment, technical adjustments, 94
  • resistance, 89
• Ingersoll, Jonathan, 144
• Input parameters, simulation results, 222
• Interdealer trading, allowance, 75
• Interest
  • earning, FRA/futures hedges (usage), 147–148
  • payment, borrower knowledge, 74
  • reference period, 76
• Interest rates
  • jump process (usage), 86–87
  • level, function, 99
  • locking in, mismatched dates (usage), 168–172
  • volatility, 148
• International Monetary Market (IMM)
  • floor, 213
  • LIBOR swap conventions, SOFR swap replication, 197
  • SOFR-based cap/floor, hedging issues, 121
  • swaps, construction, 198
• International Swaps and Derivatives Association (ISDA), term rate formula, 80

•  
• Jump-diffusion process, 65, 66t, 137–138, 140–142
• Jump-only step function, usage, 137–138
• Jump process
  • pure jump process 14, 65
  • selection, 70
  • stochastic process, combination, 62
  • usage, 61, 69–71, 86–87
• Jumps, 70, 136–137

•  
• Laplace transformations, usage, 136
• Lending markets, conventions/mismatches, 75–78
• Lending period, example, 169f
• Linear interpolation, usage, 61
• Liquidity
  • 1M SOFR futures/3M SOFR futures, 54–56
  • futures, 56
• Loan market, movements, 75
• Loans-in-arrears conventions, 76t
• London Interbank Rate (LIBOR), 3
  • cessation, basis exposure, 110–111
  • curve, construction, 62–63
    • Eurodollar futures prices, impact, 143
  • increase, 110
  • LIBOR-based asset swap, consideration/pricing, 99–100, 113
  • LIBOR-based lending, in-advance structure, 77
  • LIBOR-based swaps, curve (usage), 192
  • LIBOR-based swap spread models, 108
  • LIBOR-based swaption volatility, 130–131
  • LIBOR-GC basis swap, market price, 108
  • LIBOR-repo spread, 99
  • money market rate, 47
  • rates, 43, 95
  • reference rate, basis, 19
  • rigging scandal, 4–6
  • switch, consequence, 12
  • technical transition, 77
  • transition, 7f, 13–14
• Long expiry options, sensitivity (reduction), 123

•  
• Market analysis, SOFR implications, 11–13
• Market prices, calculated prices (difference), 158
• Money market conventions (Actual/360), usage, 200, 202
• Monte Carlo simulations 136, 138–139

•  
• Net asset value (NAV), downside risk (minimization), 165
• Nonlinearities, result, 145–149
• Normal distribution, mean/standard deviation, 24f

•  
• Objective function, minimization, 161, 179
• One-month contracts (sensitivity), FOMC meetings (impact), 70
• One-month futures contracts, repricing, 154
• One-month reference period, standard rate compounding, 150–151
• One-month SOFR (1M SOFR) (SR1) futures
  • 3M SOFR futures, contrast, 51–54
  • arithmetic average, usage, 50
  • calls, series (purchase method), 217
  • compounding, application, 135
  • contract
    • convention, FF contract convention, similarity (implications), 50
    • simple average, 9, 74
  • conventions, 50
  • demand, 89
  • distribution, 55–56
  • Fed Funds (FF) futures, spread, 50
  • fitted curve pricing errors, 158f
  • FOMC meetings, impact (assessment), 56–60
  • liquidity, 54–56
  • options, 117, 132–136, 133f
    • pricing problem, 212
    • replacement role, 215
  • prices, stepwise rate curve (fitting), 170t
  • reference periods, FOMC meeting dates (relationship), 58f
  • settlement calculations, 49f
  • spread, 51–52, 52t, 53f, 95
  • SR1:FF spread contracts, 111
  • technical specifications, 50f
  • time periods, coverage, 51f
  • usage, hedging alternative, 173–174, 173f
• One-month SOFR (1M SOFR) (SR1), payout equation, 150
• One-year (1Y) Treasuries, specialness (absence), 196
• Optimization algorithm, usage, 84
• Options
  • European-style exercise, usage, 135
  • option-pricing models, usage, 139
  • pricing model, usage, 138
  • standard options, exotic options (spread), 138
• Ornstein-Uhlenbeck process modeling, 68f
• Overnight forward rates, stepwise term structure (building), 184
• Overnight index swaps (OIS), usage, 111, 113
• Overnight short rate, correlation, 152–153

•  
• Parallel curve shifts, impact, 51, 199
• Par rates, extraction, 43
• Path-dependent exotic Asian option, future option, 9–10
• Present value, calculation, 146
• Price adjustments, 154
• Pricing, SOFR futures (usage), 60–63
• Principal components analysis (PCA), usage, 123, 127
• Process selection, effect, 63–68, 139–142
• Profit and loss (P&L) accounts, interest, 153
• Pure diffusion/drift process, 65, 141
• Pure jump process, 14, 65, 141
• Pure Vasicek process, usage, 67t

•  
• Quants, calculations, 153

•  
• Realized volatility, 131f
  • curve, slope position, 129
  • distribution, 124–127
  • implied volatility, contrast, 122–123
  • spreads, 124
• Reference period
  • initiation, 9–10, 116, 212
  • pricing, 137–139
  • SOFR rate, 57
• Reference quarter
  • hedge management, 213–216
  • initiation, 121
• Reference rate
  • basis, 19
  • manipulation, exclusion, 31
• Reference repo rate, calculation, 21
• Regularity condition, inclusion/usage, 160f, 161
• Relationship Between Forward Prices and Futures Prices (Cox/Ingersoll/Ross), 144
• Relative value (RV) relationship, application, 108–109
• Relative value (RV) trades, 93
  • spread futures, usage, 105–108
• Repo data, Fed sharing refusal, 32–33
• Repo market, 6–7, 17–18
  • contributions (SOFR calculation), 21–22
  • data, big bank access, 32–33
  • data input usage, 20f
  • reference rate, stability requirements, 18
  • volume, 22f
• Repo rate
  • difference (percentile measurement), 23f
  • distribution, 22–25
  • origin, 21–25
  • reference repo rate calculation, 21
• Repo transactions volume
  • elevation, 30
  • usage, 30f
• Riskless curve, usage, 145
• Risk/return, assessment, 43
• Risk weighting, 99
• Rolldown, assessment, 43
• Rolls, 49, 49f
• Ross, Stephen, 144

•  
• Secured Overnight Financing Rate (SOFR), 166f
  • actual/implied values, 168f
  • aggregation, 36f, 214f
  • benefits/problems, 30–33
  • daily overnight SOFR values, 150
  • daily rates, individual rate (integration), 193–194
  • data pool (percentiles), normal distribution (standard deviation/mean), 24f
  • data resources, 32f
  • definitions/features, 18–20
  • effective Fed Funds rate (EFFR), 25, 26f
  • EFFR, relationship, 101
  • Fed Funds, contrast, 25–28
  • fitted SOFR curve, 159f
  • forward SOFR curve, functional forms (differences), 62f
  • future daily volume, 54f
  • future open interest, 55f
  • implications, 11–13
  • index, 78, 82–83
  • integration, 194f
  • issuance, 79f
  • jumps, SR1 futures coverage (absence), 52
  • lending markets, term rate (relationship), 73
  • LIBOR change, consequence, 12
  • LIBOR transition, 7f
  • market, 6–7, 13
  • OIS, CME clearance, 200
  • one-month SOFR futures contract, simple average, 9
  • optimization algorithm, usage, 84
  • options, 8–11
  • Ornstein-Uhlenbeck process modeling, 68f
  • publication, 20f
  • raw data, secrecy, 33
  • repo market, 17–18, 20f
  • risk, 165
  • SOFR-based cash loans/securities, simple/compound conventions share (impact), 55
  • SOFR-based floors/options, 220f
  • SOFR-based lending markets, 75–80
  • SOFR-based swaps (hedging), SOFR futures (usage), 114
  • SOFR-related instruments, consideration, 63
  • spikes, 25, 86–87
    • standing repo facility (SRF), relationship, 28–30
  • spread futures, basis (relationship), 93
  • swaps
    • annual payments, application, 200–201
    • curve (building), SOFR futures (usage), 154–161
    • hedging, SOFR futures (usage), 197–205
  • three-month SOFR (3M SOFR) (SR3) futures contract, compounded average, 8–9
  • transition, lender actions, 110–111
  • values, 56, 77
    • compounding, 192
  • volatility, 65, 142
• Secured Overnight Financing Rate (SOFR) calculation, 19f
  • data pool, repo transactions volume, 30
  • repo market contributions, 21–22
  • repo rate distribution, usage, 22–25
  • repo rate usage, origin, 21–25
  • repo transactions volume, usage, 30f
• Secured Overnight Financing Rate (SOFR) curve
  • building, pricing, 143
  • construction, 62–63
  • construction, example, 155–161
  • fitted stepwise overnight SOFR curve, 171f, 172f
• Secured Overnight Financing Rate (SOFR) futures, 8–11, 35
  • biases, 149–153
  • CME American-type options, application, 136
  • complex, nonlinearities, 149–151
  • contracts prices, usage, 83
  • curve, average Sharpe ratios, 127f
  • financing bias, 152–153
  • jump process, usage, 69–71
  • lending period, 169f
  • options, 115
    • change, 9–10
    • Eurodollar (ED) futures options, contrast, 130–132
    • expiration, 116–117
    • pricing, process selection (impact), 139–142
    • reference period pricing, 137–139
  • price options, model suitability, 136–137
  • prices, 41f, 155t
  • pricing, process selection (effect), 63–68
  • reference quarter information, 39f
  • settlement calculations, 38f
  • standard options, forward rate (referral), 10
  • STIR, relationship, 94–95
  • Treasuries, contrast, 195–197
  • usage, 62–63, 165, 197–210
• Secured Overnight Financing Rate (SOFR) term rate
  • calculation, 13, 86f
  • hedging, jump process (usage), 69–71
  • interdealer trading, allowance, 75
  • introduction, 77
  • reliance, 75
  • specifications, 85f
• Secured rate curve
  • current implied volatility, historical realized volatility (contrast), 128f
  • realized volatility, 125t, 126f
• Secured repo rate, unsecured LIBOR (spread equation), 98–99
• Secured-unsecured basis
  • elimination, 112
  • factors, 98–101
  • model, 102–103
  • pure market price, 96
  • SR3:ED spread futures exposure, 55
• Secured yield curve
  • analysis tools, usage, 11–12
  • realized volatility, distribution, 124–127
  • three-month forward rates, 43f, 44f
• Settlement prices
  • determination, mathematical formulas (usage), 51
  • simulation, factors, 65
• Sharpe ratios, usage, 127f
• Short-term interest rate (STIR)
  • contracts, spread calibration, 138
  • futures, introduction (effects), 108
  • SOFR futures, relationship, 94–95
  • spreads, forces, 95–96
• Short term interest rate (STIR) contracts, classification, 93
• Simple averages, Fed publication, 78
• Simple averaging
  • daily compounding, contrast, 80–81
  • demand, 89
  • usage, 74
• Six-month reference periods, 87
• Six-month SOFR (6M SOFR) term rate, exposure, 69
• Six-month (6M) term rate, 45–46
• Six-month (6M) term SOFR rate, 181f
• Smoothness, definition, 160
• Specialness, absence, 196
• Spline model, usage, 43, 87
• Spread contracts (CME), 96–98, 97t, 98f
• Spread futures
  • pricing, 104–105
  • usage, 105–108
• Stability goal, SOFR solution, 30–31
• Standard deviation, 24f
  • estimation, 32
  • impacts, 148
  • observation, histogram, 25f
• Standard options, exotic options (spread), 138
• Standing repo facility (SRF), impact, 86
• Standing repo facility rate (SRFR), 28–29
• Standing repo facility (SRF), SOFR spikes (relationship), 28–30
• Start value, bumping, 70
• Stepwise rate curve, fitting, 170t
• Stepwise term structure, building, 184
• Stepwise yield curve, values determination, 180
• Stochastic process, jump process (combination), 62
• Strike prices, range, 134
• Strikes
  • adjustment (formula), 218
  • implied strikes, 219f
• Strip rates, 45–48, 47f
• Strips, 45–48
  • contracts, consideration, 208
  • future strip, usage, 61
• Sum of squared differences, minimization, 158
• Swaps
  • end date, correspondence (absence), 201–202
  • floating leg function, SOFR (relationship), 111–114, 112f
  • hedging, SOFR futures (usage), 191
  • markets, convergence, 194–195
  • present value
    • equation, 198
    • sensitivity, calculation, 199
  • SOFR-based swaps (hedging), SOFR futures (usage), 114
  • SOFR swap curve (building), SOFR futures (usage), 154–161
  • start date, correspondence (absence), 201

•  
• Term-lending, 8
• Term rates, 83–84
  • calculation, SOFR futures contracts prices (usage), 83
  • compound term rate, example, 81t
  • conceptual difference, 117
  • demand, 89
  • evolution, scenarios, 88–92
  • hedge, future strip (usage), 61
  • hedging costs, 92
  • ISDA formula, 80
  • obtaining, market participant survey (usage), 83
  • persistence, consequences, 90–92
  • setting, administrative/expert judgment (usage), 83
  • shift, hedging costs (impact), 88–90
  • SOFR lending markets, relationship, 73
  • technical adjustment, 112
• Term SOFR
  • exposure, hedging, 182–183
  • methodology, 178
  • model (inputs), futures prices (obtaining), 182
• Term structure model, usage, 151–152
• Three-month (3M) CME Term SOFR payments, 183–185
• Three-month (3M) contracts, formula, 57
• Three-month (3M) forward rates, 43f, 44f
• Three-month (3M) forward SOFR, 3M SOFR futures market prices, 43–45
• Three-month LIBOR (3M LIBOR)
  • contract, reference quarter, 95
  • function, 104
  • term rate, 212
• Three-month SOFR (3M SOFR) (SR3) futures
  • 1M SOFR futures, contrast, 50–54
  • actual SR3:ED spread, modeled SR3:ED spread (contrast), 104f
  • average settlement price, simulation, 66t, 67t
  • contracts, formula, 57
  • conventions, 36–41
  • distribution, 55–56
  • ED future, contrast, 36–37
  • ED spread futures, exposure, 55
  • fitted curve pricing errors, 159f
  • FOMC meetings, impact (assessment), 56–60
  • liquidity, 54–56
  • market prices, 43–45
  • options, 117–122, 118f, 119f, 120f
  • payout, equation, 149
  • realized volatility, 131f
  • reference periods, FOMC meeting dates (relationship), 58f
  • response, decrease, 41
  • rolls, 49
  • SOFR-based floors/options, 220f
  • spread, 51–52, 52t, 53f, 95
  • SR3:ED future spread, 104, 105t
  • SR3:ED spread regression, 103f, 103t, 107f, 107t, 109
  • SR3:FF spread contracts, 111
  • strips, 45–48
  • technical specifications, 38f
  • time periods, coverage, 51f
  • usage, 46f
  • volatility, decrease, 41
• Three-month SOFR (3M SOFR) (SR3) futures contracts
  • compounded average, 8–9
  • final settlement price, 171–172
  • settlement price, formula, 37
• Three-month term rate, futures dependence, 87
• Three-month (3M) term SOFR, hedge (calculation), 185t
• Time periods, coverage, 51, 51f
• Treasuries
  • evolution, 209f
  • hedging, SOFR futures (usage), 205–210
  • present value, 205
  • SOFR future strips, 195–197
• Treasury note, hedge (evolution), 207t
• Two-year Japanese Yen CCBS (2Y JPY CCBS), 103f, 103t, 107f, 107t, 109f
• Two-year (2Y) Treasuries, specialness (absence), 196

•  
• Unsecured LIBOR rates, secured (repo) rates (relationship), 130
• Unsecured rates, secured rates (basis), 8
• Unsecured yield curve, analysis tools (transfer), 11–12

•  
• Vasicek process, 65, 67t, 139–140
• Vega level, 123
• Volatility
  • analysis, overview, 122–124
  • current implied volatility, historical realized volatility (contrast), 127–130, 128f
  • impact, 87
  • implied volatility, realized volatility (contrast), 122–123
  • realized volatility, distribution, 124–127

•  
• Yield curve
  • components, assessment, 43
  • flattening, 208–209
  • slope, impact, 51