Lookback SOFR Swap Payoffs Without Observation Period Shifts

Summary

The document distinguishes two conventions for compounded overnight-rate swap coupons. In a lookback without an observation period shift, each daily rate observation is moved earlier by a set number of business days, while the accrual weights remain tied to the original calculation period. An observation period shift instead moves the full observation schedule relative to the accrual period. These conventions affect which fixings feed the floating coupon and how day counts are applied.

The author asks whether the coupon under the first convention can be estimated efficiently using a ratio of cumulative cap factors at the period end and start, a shortcut proposed for other conventions and useful for pricing or curve bootstrapping. The document supplies no derivation or answer, so it does not establish that the ratio works when observation dates shift but weights do not. The practical question is how to preserve the correct weighting while avoiding daily recomputation.

Key ideas

• A lookback without observation period shift moves daily fixing dates earlier while retaining the original accrual weights.
• An observation period shift moves the observation schedule relative to the calculation period.
• The document proposes a cap-factor ratio as a possible computational shortcut for compounded overnight coupons.
• It leaves unresolved whether that shortcut applies to the no-shift lookback convention.

Tags

# Estimation of RFR payoffs of flavor Look-back with NO observation period shifts


# Estimation of RFR payoffs of flavor Look-back with NO observation period shifts












With the new RFR swaps (Say $IRS Fixed to compounded SOFR), there are several adjustments that can be done to allow some room for the coupon on the floating leg to be known a couple of days ahead of its payment date (I guess to allow some time for settlement validation/reconciliation):



- Lookback WITHOUT observation period shift: Meaning each daily fixing date is shifted by say -2bd but the weights (observation periods day counts) remains the same

- Observation period shift: All the observation period is shifted from the calculation period.

- ...

For 1 and 3, and for performance reason (whether pricing a trade or bootstrapping a curve), one could estimate the cash flows by a ratio of the cap factor at the end of the period / start of it.

Is there a similar approach for lookback WITHOUT observation period shifts?

Hope my question is clear.

Thank

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