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In SOFR Discount Curve Construction in Nov 2021, @dm63 does an excellent job describing the way to build the SOFR discount curve. A few questions:

  1. What is the market convention for building the front-end of the curve?

  2. Do folks use the SOFR fixings or SOFR futures more commonly?

  3. What are the pros and cons of each method in question 2?

  4. When using SOFR futures to build the curve, is it common to use SOFR futures expiries past 2 years (i.e. similar to when folks would use a strip of 4 or 5 years of Eurodollar futures to build the LIBOR discount curve, then use swaps beyond that point)?

Thanks!

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The front end of the SOFR curve has a lot of structure in it. I cant talk to "market convention" as I doubt something like that exists yet but I use

  • Fixed for floating SOFR swaps (1w, 2w, 3w, 1m, 2m, 3m etc)
  • FOMC dated fixed for floating swaps (next 4 FOMC dates)
  • On the run (so not yet fixing) SOFR futures in the white and red period

to build the very front end of my SOFR curve.

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  • $\begingroup$ Great answer. I am not very familiar with USD market. 1) can you tell me why don't you just use Fixed for floating SOFR swaps for the whole curve? The curve is very granular in the short end. 2) are FOMC dated Swaps spot starting swaps or forward swaps between FOMC meeting dates? When do they start and when do they end? 3) do you use convexity adjustment for the futures? If so, what model do you use? $\endgroup$
    – emot
    Jan 17, 2022 at 8:50
  • $\begingroup$ can you share the details? $\endgroup$
    – emot
    Jan 18, 2022 at 18:43

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