✅ What is SOFR?
SOFR = Secured Overnight Financing Rate
An interest rate that reflects the cost of borrowing for one night using U.S. Treasury securities as collateral.
⚙️ How is SOFR calculated?
It is calculated daily from actual transactions in the Repo Market.
Participants: banks, major institutions, brokers.
It is managed by: the Federal Reserve Bank of New York in cooperation with the Office of Financial Research.
It relies on the volume-weighted median of secured transactions.
📊 Why was LIBOR replaced by SOFR?
LIBOR was based on bank estimates ➜ prone to manipulation.
SOFR is based on real trades ➜ more transparent and accurate.
Since 2023, LIBOR has been phased out in favor of SOFR.
🧮 Uses of SOFR:
Benchmark in pricing:
Corporate loans
Adjustable-rate mortgages
Financial derivatives (like swap contracts)
Bonds and securities backed by loans.
📉 Averages and SOFR Index:
30/90/180 days: used for pricing long-term instruments.
SOFR Index: reflects the time accumulation of SOFR to facilitate the calculation of accrued interest.
📈 SOFR futures:
Traded on the Chicago Mercantile Exchange (CME).
Two types:
One month (value $25 per basis point)
Three months (value $12.5 per basis point)
Used for:
Hedging interest rate fluctuations
Forecasting economic trends
Pricing alternative products to LIBOR