Overhedging and SOFR: Difference between pages

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Overhedging is a form of speculation.
''US interest rate benchmarks''.


It means intentionally hedging an amount GREATER THAN the total related risk exposure, for example by the use of a derivative instrument with a principal amount of 200% of the related risk exposure.  
SOFR is the Secured Overnight Financing Rate.  


The effect of overhedging in this way is to create a new purely speculative position in the derivative instrument.
This is a broad treasuries repo financing rate, recommended as a benchmark by the Alternative Reverence Rates Committee (ARRC) of the Federal Reserve.


The size of the new speculative position is equal to the excess of the principal amount hedged, over 100%.
It is published by the New York Fed at approximately 8am local time.  




For example in this case the size of the new speculative position is 200% - 100% = 100%.  
3 April 2018 was the first time SOFR was published. It is calculated based on actual transactions and is a volume-weighted median.  


In other words equal in size to the original exposure being hedged.
In the first three months of the publication of SOFR the underlying overnight lending transaction volume was on average approximately USD 800 billion.  


The new speculative position is in the opposite direction to the original exposure.


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.


== See also ==
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.   
* [[Hedging]]
* [[Underhedging]]


[[Category:Risk_Management]]
 
[[Category:Commodity_Risk]]
==See also==
[[Category:FX_Risk]]
*[[Alternative Reference Rates Committee]]
[[Category:Interest_Rate_Risk]]
*[[Federal Reserve]]
*[[IBOR]]
*[[LIBOR]]
*[[Reference rate]]
*[[Risk-free rates]]
*[[Repo]]
*[[SOFR term rate]]
*[[SONIA]]
*[[Treasury]]
 
 
===Other links===
 
[[Media:Slaughter and May interest rate benchmarks.pdf| 2021: A Benchmark Odyssey, Practical Guidance for Treasurers on interest rate benchmarks, Slaughter and May]]
 
[[Category:Corporate_financial_management]]

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