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Convexity Adjustments for SOFR Futures and Swap Curve Bootstrapping

Article Quant Q&A · Author: Philippe Hatstadt
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Summary

The document raises a curve-construction question about combining SOFR futures at the front end with SOFR swaps at the longer end. It notes that centrally cleared swaps require daily cash variation margin and asks whether that feature makes their economics sufficiently similar to SOFR swap futures to eliminate the convexity adjustment traditionally associated with earlier rate-futures and swap curve construction.

No answer, pricing derivation, market evidence, or industry convention is included. The premise that cash variation margin makes the instruments equivalent is presented as a hypothesis to check, not as an established result. The text therefore serves as a prompt about how margining and contract structure affect futures-versus-forward rate differences, rather than guidance on whether an adjustment should be applied. A practitioner would need to assess the specific instruments, clearing and collateral terms, and valuation framework before drawing a conclusion.

Key ideas

  • The question concerns convexity adjustments when bootstrapping a curve from SOFR futures and swaps.
  • It links cash variation margin on cleared swaps with the margining of SOFR swap futures.
  • The document asks whether this similarity removes the need for an adjustment.
  • It supplies no conclusion or evidence, so the adjustment decision remains unresolved.

Tags

Fixed incomeFuturesDerivatives pricing
Full text
# SOFR futures convexity adjustment versus SOFR swaps


# SOFR futures convexity adjustment versus SOFR swaps












Since SOFR swaps are centrally cleared, daily variation margin has to be posted to the CCP, and if I am not mistaken, this is done in cash. If so, this is the same mechanism as CME SOFR swap futures. If so, when bootstrapping a curve with SOFR futures in the front, and SOFR swaps in the back, is it necessary or not to apply convexity adjustments like used to be required for Libor swaps and Eurodollar futures? I would think not, but wanted to know what is now industry standard?

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