Overnight Futures: Convexity Adjustment

Abstract

In this note we describe the pricing, including the convexity adjustment, of the a new overnight benchmark based futures in the collateral framework using a Gaussian HJM-like model. The note also describes in details the cash-flows of the instrument. The adjustment obtained is relatively similar to the one obtained for LIBOR futures when the stochastic nature of the LIBOR/OIS spread is ignored. Some extra small adjustment need to be added to take into account that the futures settles only at the end of the accrual period while the LIBOR futures settle on fixing at the start of the underlying deposit period.

Keywords: overnight, futures, collateral, convexity adjustment

JEL Classification: G13, E43