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The final stretch: outstanding issues in non-linear RFR derivatives

The panel

  • Ping Sun, Senior vice-president, financial engineering, Numerix
  • Ralph Axel, Director and US rates strategist, Bank of America Global Research
  • Matthew Franklin-Lyons, Managing director, JP Morgan Chase
  • Moderated by: Helen Bartholomew, Editor-at-large, Emea, Risk.net

Six months on from Libor’s cessation, cash and derivatives markets have adapted quickly to the new multi-rate world. In the US, where selected US dollar Libor tenors will remain in place until mid-2023, the secured overnight financing rate (SOFR) is firmly established as the preferred alternative for derivatives.

However, one area of the market remains resistant to change: non-linear derivatives – such as options, caps and floors – are poorly suited to backward-looking benchmarks such as SOFR, and market participants face difficult questions around product structure, volatility, valuation, pricing, liquidity and hedging.

Key topics discussed:

  • How the market is adapting to SOFR swaptions
  • The products best suited to SOFR
  • Lessons from the latest deals and developments
  • The current state of the market: volumes and liquidity in risk-free rate options, caps and floors, and other complex products
  • Valuation and pricing hurdles associated with in-arrears rates
  • Challenges and developments in modelling volatility in SOFR and overnight rates.

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