Convexity Adjustments in SOFR Futures Sensitivity

Summary

The document answers whether exchange-quoted SOFR futures prices remove the need for convexity adjustments when calculating interest rate futures sensitivity. Its answer is that adjustments may still matter for financing bias, even when using market prices. It also identifies a potential nonlinearity in one-month SOFR futures that is associated with arithmetic averaging, contrasting this with the geometric averaging used for three-month contracts.

The response characterizes the adjustments as likely smaller than those encountered with LIBOR or Eurodollar futures, but does not quantify the difference or give a calculation procedure. It is a brief conceptual answer rather than a derivation or sensitivity analysis, so readers need further material to determine the size of the effects for a particular contract, financing setup, or valuation task. The core lesson is that observed futures prices do not necessarily eliminate every modeling adjustment relevant to risk sensitivity.

Key ideas

• SOFR futures prices do not necessarily eliminate convexity adjustments in sensitivity calculations.
• Financing bias can remain relevant when measuring interest rate futures exposure.
• One-month and three-month SOFR contracts differ in their averaging conventions, which can affect nonlinearity.
• The answer suggests these effects are smaller than comparable LIBOR or Eurodollar adjustments but provides no quantitative method.

Tags

# Convexity Adjustments Futures - Sensitivity


# Convexity Adjustments Futures - Sensitivity












If the market prices of SOFR futures are obtained from CME, do we still need to compute convexity adjustments when computing the sensitivity of the IR future?

## Answer by user68318 (score 0)

https://quant.stackexchange.com/a/76298

Short answer: you still need to compute for financing bias, and there will still be some nonlinearity to account for in the 1-month (but not the 3-month) since it uses arithmetic averaging instead of geometric averaging as in the case of the 3-month. But in any case, the adjustment amounts are likely smaller than with LIBOR/Eurodollars.

Long answer: see Chapter 6 of Huggins & Schaller's SOFR Futures & Options (Wiley Finance) (you can get 30% off by using CME's discount code).

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.