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SARON: SARON-Based Products and Derivatives

SARON · Work through your exam, one topic at a time.

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SARON-Based Products and Derivatives

This domain tests whether you can price and document instruments that pay compounded SARON: cash products such as floating-rate notes, and derivatives such as OIS, futures and basis swaps. Most marks are lost on conventions and on the difference between backward-looking compounded SARON and a forward-looking term rate.

Cash products

  • Compounded SARON floating-rate notes (Pfandbriefe, bank and corporate notes): coupon = compounded SARON over the interest period + spread, fixed in arrears, act/360.
  • SARON-linked mortgages, syndicated loans and overnight call money; the reset lag between observation period and payment date is contractual, not cosmetic.

Derivatives

  • SARON OIS: fixed versus compounded SARON in CHF; the primary hedging and discounting instrument for CHF books.
  • Eurex Three-Month SARON futures: cash-settled against compounded SARON for the reference quarter, quoted as 100 minus the rate.
  • Basis swaps (SARON versus term fixings), swaptions, caps and floors on compounded SARON, and cross-currency swaps with a CHF SARON leg.
  • Collateralised CHF derivatives are discounted on the SARON OIS curve; legacy LIBOR trades use fallback rates and spreads.

Worked example

A CHF 5,000,000 note pays compounded SARON plus 60bp for a 92-day period. Compounded SARON for the period turns out to be 0.4125%. Coupon rate = 0.4125% + 0.60% = 1.0125%. Interest = 5,000,000 x 0.010125 x 92/360 = 50,625 x 0.255556 = CHF 12,937.50. Note the sequence: the compounded rate is only known at the end of the period, so both parties carry a small accrual uncertainty until the final fixing; the spread compensates for credit and funding, the compounding for the overnight roll.

Traps

  • Quoting a SARON future as the rate rather than 100 minus the rate, and confusing tick value with DV01.
  • Pricing an FRN as if the coupon were fixed at the start of the period (LIBOR habit).
  • Ignoring the observation lag or lookback written into the confirmation; two notes with identical spreads can pay differently.
  • Discounting CHF collateralised cash flows on an old LIBOR curve rather than SARON OIS.
  • Overlooking convexity between futures-implied and OIS-implied forward SARON.