Option risk and SOFR: Difference between pages

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1.  ''Banking''.
''US interest rate benchmarks''.


Banks' lending and deposit-taking relationships with their customers often give valuable options to the customers, as part of the relationship.
SOFR is the Secured Overnight Financing Rate.  


For example, a customer's right to repay a fixed rate mortgage early.
This is a broad treasuries repo financing rate, recommended as a benchmark by the Alternative Reverence Rates Committee (ARRC) of the Federal Reserve.


It is published by the New York Fed at approximately 8am local time.


'Option risk' is the risk to the bank which arises from the possibility that the customers might exercise their rights of this kind, to the disadvantage of the bank.


3 April 2018 was the first time SOFR was published. It is calculated based on actual transactions and is a volume-weighted median.


2. ''Risk management - real options.''
In the first three months of the publication of SOFR the underlying overnight lending transaction volume was on average approximately USD 800 billion.  


More broadly, the risk to any organisation or individual that another market participant may exercise a real option, causing loss or inconvenience to the organisation or individual exposed to the option risk.


LIBOR, which is currently used as the main benchmark rate, is expected to discontinue by 2021 in light of multiple irregularities and lack of sustainability in the absence of an active underlying market.


3.  ''Risk management - financial options.''
SOFR is the new benchmark USD rate (alternatively known as risk-free rate) and ARRC is working with the industry to transition to SOFR from LIBOR.  


Any risk associated with a financial option, whether as the writer or the holder of the option.


==See also==
*[[Alternative Reference Rates Committee]]
*[[Federal Reserve]]
*[[IBOR]]
*[[LIBOR]]
*[[Reference rate]]
*[[Risk-free rates]]
*[[Repo]]
*[[SOFR term rate]]
*[[SONIA]]
*[[Treasury]]


== See also ==
* [[Banking book]]
* [[Basis risk]]
* [[IRRBB]]
* [[Market Risk in the Banking Book]]  (MRBB)
* [[Option]]
* [[Prepayment risk]]
* [[Real option]]
* [[Risk management]]
* [[Writer]]


[[Category:The_business_context]]
===Other links===
[[Category:Identify_and_assess_risks]]
 
[[Category:Manage_risks]]
[[Media:Slaughter and May interest rate benchmarks.pdf| 2021: A Benchmark Odyssey, Practical Guidance for Treasurers on interest rate benchmarks, Slaughter and May]]
[[Category:Risk_frameworks]]
 
[[Category:Risk_reporting]]
[[Category:Corporate_financial_management]]
[[Category:Financial_products_and_markets]]

Revision as of 08:04, 12 September 2021

US interest rate benchmarks.

SOFR is the Secured Overnight Financing Rate.

This is a broad treasuries repo financing rate, recommended as a benchmark by the Alternative Reverence Rates Committee (ARRC) of the Federal Reserve.

It is published by the New York Fed at approximately 8am local time.


3 April 2018 was the first time SOFR was published. It is calculated based on actual transactions and is a volume-weighted median.

In the first three months of the publication of SOFR the underlying overnight lending transaction volume was on average approximately USD 800 billion.


LIBOR, which is currently used as the main benchmark rate, is expected to discontinue by 2021 in light of multiple irregularities and lack of sustainability in the absence of an active underlying market.

SOFR is the new benchmark USD rate (alternatively known as risk-free rate) and ARRC is working with the industry to transition to SOFR from LIBOR.


See also


Other links

2021: A Benchmark Odyssey, Practical Guidance for Treasurers on interest rate benchmarks, Slaughter and May