Discounting Interest Rate Options on SOFR, SONIA, and Euribor Futures

Summary

The document addresses whether options on SOFR, SONIA, and Euribor futures should be discounted. Its answer is that discounting still applies because derivative cash flows have time value. It suggests deriving the discount rate from the product's associated interest-rate curve, giving the Euribor curve as an example for Euribor products.

The response is brief and does not describe a valuation formula, distinguish the conventions for each product, or explain how futures-style margining might affect pricing. It offers a general principle rather than a full treatment of option valuation. Readers should therefore treat it as a concise convention-oriented answer, not a complete specification for building or calibrating a pricing model.

Key ideas

• Derivative cash flows retain time value, so discounting applies to interest-rate options.
• The response proposes using the curve associated with the underlying rate product.
• The Euribor curve is given as an example for Euribor-linked products.
• The answer does not provide detailed conventions or a complete valuation method.

Tags

# Discounting on SOFR/SONIA/Euribor Options


# Discounting on SOFR/SONIA/Euribor Options












I'm modelling the price of SOFR/SONIA/EURIBOR options on their corresponding futures. Is there a convention or details on whether discounting should take place or not? If there is no discounting why would that be the case?

## Answer by Rojolithos (score 1)

https://quant.stackexchange.com/a/80241

Yes, discounting should take place. The derivative of an interest-rate product is still subject to the time value of money.

For these products, I'm fairly certain the discount rate is derived from the product itself, so for EURIBOR, you use the EURIBOR curve.

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