Why SOFR Futures and Swaps May Have Different Convexity Adjustments

Summary

The document raises a fixed-income pricing question about the relationship between SR3 SOFR futures and SOFR swaps when financing and variation-margin effects are assumed negligible. It observes that a swap coupon payoff tied to the future rate and a futures payoff tied to the same rate can both appear linear, then asks why their valuations might still require a convexity adjustment. It considers whether any remaining difference comes from discounting, payoff structure, or changes in basis-point value.

No answer or derivation is included, so the document does not resolve the issue or provide empirical evidence. Its value is in identifying assumptions that matter when comparing a futures quote with a swap rate: the treatment of cash flows, discounting, margin financing, and rate sensitivity. The question alone does not establish that convexity adjustment remains when financing effects are removed, nor does it specify a model or contract details sufficient to calculate one. Readers should treat it as a prompt for pricing analysis rather than a settled explanation.

Key ideas

• The question compares SR3 futures and SOFR swap pricing under negligible margin financing effects.
• Both payoff expressions can appear linear in the future reference rate.
• Potential sources of a remaining difference include discounting, payoff timing, and changing rate sensitivity.
• The document provides no answer, derivation, or evidence to settle the pricing question.

Tags

# SR3/sofr swap convexity adjustment if financing effects are negligible?


# SR3/sofr swap convexity adjustment if financing effects are negligible?












Following up on this post: SOFR futures convexity adjustment versus SOFR swaps

I am trying to understand the convexity adjustment between SR3 futures and SOFR swaps in the case where financing / variation-margin effects are negligible. If I ignore any interest earned or paid on variation margin, then I do not see why the swap payoff should be treated as a discounted PV object while the SR3 payoff should not. A future swap/OIS-style coupon like (K−R)Nd and an SR3 terminal payoff like 100−R both look like linear future payoffs in R. So if financing effects are assumed away, why is there still a convexity adjustment between an SR3 strip and a SOFR swap? Is the remaining difference truly about payoff geometry / changing BPV, or should both simply be viewed as discounted future cashflows in that thought experiment?

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