Averaged Overnight Rate Futures: Convexity Adjustment

5 Pages Posted: 15 Apr 2019

Date Written: March 1, 2019

Abstract

The convexity adjustment for averaged overnight rate futures, like SOFR 1m futures, is derived including the case where trading occurs during the reference period. These results are more general than previous work that relied solely on the HJM framework, and the results herein can easily incorporate and reuse previous derivations. Numerical results demonstrate that the averaged overnight rate futures convexity adjustment is close to the convexity adjustment for compounded overnight rate futures, which is due to the close proximity of daily compounding to the continuous compounding limit.

Keywords: overnight, futures, average, convexity adjustment, sofr

JEL Classification: G13, E43

Suggested Citation

Rosen, Jonathan, Averaged Overnight Rate Futures: Convexity Adjustment (March 1, 2019). Available at SSRN: https://ssrn.com/abstract=3350745 or http://dx.doi.org/10.2139/ssrn.3350745

Jonathan Rosen (Contact Author)

FINCAD Corporation ( email )

Central City, Suite 1750
13450 102nd Ave
Surrey, British Columbia V3T 5X3
Canada

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