Building SOFR Discount Curves from OIS and Futures

Summary

The document considers how to construct a SOFR discounting curve for valuing derivatives as discounting transitions from the Effective Federal Funds Rate. It challenges the premise that no usable SOFR term structure exists: the response points to a liquid SOFR overnight indexed swap market and available futures as potential curve instruments.

The practical takeaway is that SOFR curve construction resembles other interest rate curve building. Instrument selection depends on liquidity and the curve-construction approach; the response notes that federal funds curves are often built without futures, while futures remain a possible input. It cites external analysis but gives no instrument specifications, bootstrapping steps, or quantitative comparison of portfolio impacts. The discussion is therefore a useful orientation rather than a complete implementation guide, and its market-liquidity assessment reflects the time of the original question.

Key ideas

• SOFR discount curves can be built using market instruments such as overnight indexed swaps and futures.
• A usable SOFR term structure need not depend on a published term rate.
• Instrument selection follows the same liquidity and construction considerations used for other curves.
• Federal funds curves are often constructed without futures, though futures may be considered.

Tags

# SOFR Discounting & Price Alignment Transition


# SOFR Discounting & Price Alignment Transition












CME Group is planning to migrate the discounting to SOFR from Effective Fed Funds Rate (EFFR). Below is the link to their article: https://www.cmegroup.com/education/articles-and-reports/sofr-price-alignment-and-discounting-proposal.html

I want to understand how this SOFR discounting curve can be prepared as there is NO term structure as of now for SOFR rate. I have seen similar articles where firms are comparing the impact on derivatives portfolio of moving to SOFR discouting.

## Answer by AKdemy (score 2)

https://quant.stackexchange.com/a/63629

There is (and was at the time of asking) a fairly liquid Outright SOFR OIS market. You also have futures. So there really is not much of a difference. Risk.net analyzed this. I think frequently OIS curves (FF) are constructed without futures but ultimately, instrument selection follows the same considerations for all curve construction exercises.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.