Has anyone considered trading SR3 vs SR1 SOFR futures? They both have the same underlying basis of daily SOFR, and how would one calculate a hedge ratio for the SR1 to trade along SR3?
Looking at the contract specifications, the SR3 settles to a daily compounded value and the SR1 settles to an arithmetic average of the same daily SOFR print by Bank of New York. It looks like there is a big difference trading and hedging SR3 when it enters it's reference period versus contracts that are "outside" of the reference period. If one to trade SR3 outside of the reference period and hedging with SR1, I think you just need to do basis point neutral at $25(SR3) to $41.67(SR1) or roughly 10 SR3 to 6 SR1.
However, once you enter the reference period, one needs to constantly adjust the BPV due to both known and unknown values of the daily SOFR print and as the sofr get closer and closer to expiration, the hedge ratio changes.