Appreciate the video! If I understand this video correctly, you can only hedge out changes between the market *expectations* of SOFR, and what the SOFR actually ends up being. Eg, if on February SOFR is low, but the market is already pricing in a higher SOFR rate during the period of your loan: If SOFR does indeed end up being high for the duration of your loan, your hedge will do nothing. So you're not hedging out a change in SOFR (between February and the time period of your loan), you are hedging out a change in SOFR only between the current market expectations of it in that time period, and what it actually ends up being.
Nicely explained. I hold no opinion on LIBOR but I'm not too keen on the fact they're decided to get rid of it, rendering ED futures obsolete in the process. I'm hoping SOFR futures will trade just as well.
There is a correction needed here. The fixing of the Libor settlement rate (in case of Eurodollar futures) also happen 2 days prior to the expiry date of the contract. Could you please either clarify or rectify this point ?
For Case B, if 3m implied SOFR is 1.70%, wouldn’t I make a loss on the futures instead of a gain? And the loss from futures will add on to the overall borrowing cost?
For Case B, the 3m implied SOFR will be 100 - 98.70 = 1.30(%). This will imply a gain / loss on futures position equal to 100 * (98.495 - 98.70) * 25 * 100 = -51,250 (i.e. loss, since it is negative). In this Case B, borrowing cost is 100mn * (1.30% + 2%) * 0.25 = 825,000. Adding the borrowing cost and loss gives the total cost to be 876,250 i.e. same as Case A.
I probably missed when you mentioned what is the final Sofr. Suggest you make a note of the sofr fixing final rate on the screen also talk about where the final fixing came from ? Who publishes it etc? There are multiple versions of Sofr.
This is the clearest explanation of SOFR and SOFR futures I've watched so far..great job :) keep up the excellent work!
time stamp for preparing derivatives mid-term
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You displays how this hedge works in a neat and precise way. Thanks a lot.
Appreciate the video!
If I understand this video correctly, you can only hedge out changes between the market *expectations* of SOFR, and what the SOFR actually ends up being. Eg, if on February SOFR is low, but the market is already pricing in a higher SOFR rate during the period of your loan: If SOFR does indeed end up being high for the duration of your loan, your hedge will do nothing.
So you're not hedging out a change in SOFR (between February and the time period of your loan), you are hedging out a change in SOFR only between the current market expectations of it in that time period, and what it actually ends up being.
Thank you so much, this helped me when I had no idea what any of this did or how to calculate any of these contracts
Truly excellent!
Nicely explained. I hold no opinion on LIBOR but I'm not too keen on the fact they're decided to get rid of it, rendering ED futures obsolete in the process. I'm hoping SOFR futures will trade just as well.
Could you further explain/derive this 3m implied sofr from its overnight number?
Hey , what software do you use to make these notes. They are so aesthetic.
There is a correction needed here. The fixing of the Libor settlement rate (in case of Eurodollar futures) also happen 2 days prior to the expiry date of the contract.
Could you please either clarify or rectify this point ?
For Case B, if 3m implied SOFR is 1.70%, wouldn’t I make a loss on the futures instead of a gain? And the loss from futures will add on to the overall borrowing cost?
For Case B, the 3m implied SOFR will be 100 - 98.70 = 1.30(%). This will imply a gain / loss on futures position equal to 100 * (98.495 - 98.70) * 25 * 100 = -51,250 (i.e. loss, since it is negative). In this Case B, borrowing cost is 100mn * (1.30% + 2%) * 0.25 = 825,000. Adding the borrowing cost and loss gives the total cost to be 876,250 i.e. same as Case A.
Tks!!
Where is the 2% comimg from
It is the fixed spread (200 bps) on top of 3-month SOFR that we are assuming in our simple example.
may I ask where we can get the number of 1 million dollars for notional amount?
Hello Dino, the CME website defines "contract size" as "$25 per basis point per annum" which implies a USD 1 million position.
It took me a while to realize too, but it’s 25*10000*4 with the 4 coming from 4 quarters per year
How did you calculate the INT $ as 950,000?
100 mn * (1.80% final SOFR + 2.00% spread) * 0.25 = 950,000
I probably missed when you mentioned what is the final Sofr. Suggest you make a note of the sofr fixing final rate on the screen also talk about where the final fixing came from ? Who publishes it etc?
There are multiple versions of Sofr.
Hi does anyone trade 3msofr futures?