SOFR Futures and Options

Introduction

This book is about the SOFR futures and options complex at the Chicago Mercantile Exchange (CME). Before providing an overview of its topics, we take a look at the relevant history. To understand SOFR futures and options, we need to understand SOFR; to understand SOFR, we need to understand LIBOR; and to understand LIBOR, we need to understand Eurodollars.

EURODOLLARS

The most basic definition of a Eurodollar is a US dollar held in a bank outside of the United States. Given that dollars are fungible, it may not be obvious that a dollar held offshore should differ in any respect from a dollar held onshore. But depository institutions in jurisdictions other than the United States are subject to different regulations than those in the United States. For example, the US government is typically unable to confiscate assets held by banks domiciled outside of the United States. And this fact figures prominently in some of the origin stories of the Eurodollar market.

One such story is that the Chinese government, fearing confiscation of its dollar balances after the outbreak of the Korean War in 1950, transferred most of these balances to Banque Commerciale pour l'Europe du Nord, a Paris-based bank that had been started by Russian exiles in 1921 and acquired by Gosbank in 1925 (Dormael 1997, pp. 1–9). These offshore dollars, opened in the name of the Hungarian National Bank, became the first Eurodollars. They were later leant to various French banks and to the Paris branch ...