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SOFR Futures and Options: Essential Tools for Risk Management in Today’s Financial Landscape


The financial markets have experienced significant shifts in recent years, with various instruments evolving to accommodate the changing landscape. One such development is the increasing adoption of the Secured Overnight Financing Rate (SOFR) as a benchmark for short-term interest rates. This article will explore SOFR futures and options, their role in risk management, and their applications for global intra-day traders, swing traders, and position traders.

What are SOFR Futures and Options?

SOFR futures and options are derivatives contracts based on the Secured Overnight Financing Rate (SOFR). The SOFR is an interest rate benchmark that reflects the cost of borrowing cash overnight, collateralized by U.S. Treasury securities. It is published by the Federal Reserve Bank of New York and has been designed as an alternative to the London Interbank Offered Rate (LIBOR).

SOFR futures and options provide market participants with a means to hedge their exposure to short-term interest rate movements. These instruments have gained considerable traction due to their deep liquidity pools and broad participation from global banks, hedge funds, asset managers, principal trading firms, and other types of traders.

Applications in Risk Management

SOFR futures and options have several applications in risk management for various types of traders:

  1. Interest Rate Hedging: Traders can use SOFR futures and options to hedge their exposure to interest rate fluctuations. As Dr. Glen Brown, President & CEO of Global Financial Engineering and Global Accountancy Institute, states, “SOFR-based derivatives are essential tools for market participants looking to hedge interest rate risk in today’s evolving financial landscape.”
  2. Portfolio Diversification: SOFR futures and options can be utilized to diversify a portfolio, as they offer exposure to different sectors of the economy. Dr. Brown highlights that “incorporating SOFR derivatives into a trading strategy can provide valuable diversification benefits and help manage risk more effectively.”
  3. Trading Strategies: SOFR futures and options can be used to implement various trading strategies, such as spread trading, curve trading, and relative value trading. These strategies can be beneficial for global intra-day traders, swing traders, and position traders, as they seek to capitalize on market inefficiencies and short-term interest rate movements.
  4. Transition from LIBOR: The phase-out of LIBOR has necessitated the adoption of alternative benchmarks like SOFR. “The transition from LIBOR to SOFR has presented both challenges and opportunities for market participants,” says Dr. Brown. “SOFR futures and options have emerged as vital instruments for managing risk during this transition.”


As the financial markets continue to evolve, SOFR futures and options have solidified their position as leading tools for hedging short-term interest rates. With deep liquidity pools and broad participation from various market participants, they offer numerous risk management applications for global intra-day traders, swing traders, and position traders. Dr. Glen Brown’s insights emphasize the growing importance of SOFR derivatives in today’s complex financial landscape, making them essential instruments for effective risk management.

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The Fed Crushes the 1981 Economy. Will they do it again in 2022?

In the past, we have seen that three successive significant hikes in Fed interest rates have generally marked the beginning of bear markets and impending recessions. Over the last few days we have seen many predictions of up to even seven successive hikes.

I don’t believe the Fed should increase interest at this time….

The bear market and the costly, protracted recession that began in 1981, for example, came about solely because the Fed increased the discount rate in rapid succession on September 26,November 17, and December 5 of 1980. Its fourth increase, on May 8,1981, thrust the discount rate to an all-time high of 14%. That finished off the U.S. economy, the basic industries, and the stock market.

Let us go back in time to a little history:

October 1979 – Volcker’s Announcement of Anti-Inflation Measures

1965–1982 – The Great Inflation

Origins of the Great Inflation