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arXiv · 2401.15728

Analytic Pricing of SOFR Futures Contracts with Smile and Skew

Aurelio Romero-Bermúdez·Colin Turfus
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Abstract

We introduce a perturbative formalism to solve the backward-looking futures pricing problem. The formalism is based on a time-ordered exponential series which allows to derive the functional form of the integral kernel associated to the backward-Kolmogorov diffusion PDE. We present an analytic pricing formula for SOFR futures contracts under an extension of the Hull-White model which incorporates not only the intrinsic convexity adjustments captured by Mercurio [2018], but also the skew and smile observed in options markets as done in Turfus and Romero-Berm\'udez [2023].

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BibTeXRIS

Aurelio Romero-Bermúdez, Colin Turfus. 2024-01-28. Analytic Pricing of SOFR Futures Contracts with Smile and Skew. https://arxiv.org/abs/2401.15728

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