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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):

  1. Interdeal broker: Shift the payment date from the calculation date by +2BD
  2. 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
  3. Observation period shift: All the observation period is shifted from the calculation period.
  4. ...

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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  • $\begingroup$ I think it depends how precise you want to be; using the lookback without shift the multiplicativity relationship you mentioned unfortunately can not hold exactly. However, I strongly assume that the error in an (annualized) compound rate would be rather small if you'd simply use a daycount weight of 1/360 (or 365 or whatever) for all daily forward rates, especially for lower rates and/or 3/6/12 month compounding (most common). $\endgroup$
    – KevinT
    Jan 5, 2022 at 18:35

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