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: Suggested Citation