Can someone provide me an intuitive explanation of how discount factors are bootstrapped for SOFR when Swaps are trading with payment delay/ lag (e.g. of 2 business days).
I can intuitively derive the discount factors when the payment lag is zero e.g.
|Trade Date||Value Date||Tenor||Maturity||Swap Rate||Pay Lag|
|1 Feb 2023||3 Feb 2023 (T+2)||1M||3 Mar 2023||3.5%||0|
Since Payment Lag = 0, the cash flow date is 3 Mar 2023.
Now the discount factor from 3-Feb-2023 to 3-Mar-2023 equals 1/(1+3.5%*28/360) ==> 0.99728516
This would then get multiplied with the discount factor for 3 Feb 2023 to arrive at the final discount factor from 1-Feb-2023 to 3-Mar-2023.
However, when the payment lag is 2 days, then the Cash Flow Date is 7 Mar 2023, although accrual period remains the same (3 Feb 2023 to 3 Mar 2023). How would the discount factors get calculated, in this scenario ?
Appreciate any clarity from your side. I hope the question is clear.