SOFR (Secured Overnight Financing Rate)
The US dollar risk-free rate based on overnight Treasury repo transactions, replacing LIBOR since 2023.
SOFR is published daily by the Federal Reserve Bank of New York. It reflects the cost of borrowing cash overnight collateralized by US Treasury securities. SOFR replaced USD LIBOR on June 30, 2023. In derivatives: SOFR OIS (Overnight Index Swaps) are used to construct the risk-free zero curve for discounting. SOFR-based forward rates differ from LIBOR-based rates because SOFR lacks a credit premium — it is truly risk-free.
Interest Rate Swap (IRS)
An agreement to exchange fixed-rate cash flows for floating-rate cash flows on a notional principal.
Par Swap Rate (SFR)
The fixed rate that makes an interest rate swap have zero NPV at inception.
Black-Scholes-Merton Model (BSM)
The foundational option pricing formula that gives the fair value of a European call or put as a function of spot, strike, rate, volatility, and time.
Delta (Δ)
The sensitivity of an option's price to a $1 change in the underlying spot price.
Gamma (Γ)
The rate of change of delta with respect to the spot price — the curvature of the option's value.
Theta (Θ)
The rate at which an option loses value as time passes — time decay per calendar day.