Overnight indexed swap: Difference between revisions
imported>Doug Williamson (Add link.) |
imported>Doug Williamson (Add links.) |
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(OIS). | (OIS). | ||
A fixed rate interest rate swap against a floating rate index such as SONIA, EURONIA or | A fixed rate interest rate swap against a floating rate index such as SONIA, EURONIA, €STR, SOFR or the Federal Funds rate. | ||
The two parties to the OIS agree to exchange the difference between the interest accrued at an agreed fixed interest rate for a fixed period (for example 3 months) on an agreed notional amount, and the interest accrued on the same amount, by compounding the reference index daily over the term of the swap. | The two parties to the OIS agree to exchange the difference between the interest accrued at an agreed fixed interest rate for a fixed period (for example 3 months) on an agreed notional amount, and the interest accrued on the same amount, by compounding the reference index daily over the term of the swap. | ||
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== See also == | == See also == | ||
* [[Credit risk]] | * [[Credit risk]] | ||
* [[ | * [[€STR]] | ||
* [[EURONIA]] | * [[EURONIA]] | ||
* [[EWI]] | * [[EWI]] | ||
* [[Federal funds futures]] (FFF) | * [[Federal funds futures]] (FFF) | ||
* [[Federal Funds rate]] | |||
* [[Index]] | * [[Index]] | ||
* [[Interest rate swap]] | * [[Interest rate swap]] | ||
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* [[Principal]] | * [[Principal]] | ||
* [[Risk-free rates]] | * [[Risk-free rates]] | ||
* [[SOFR]] | |||
* [[SONIA]] | * [[SONIA]] | ||
* [[Swap]] | * [[Swap]] | ||
[[Category:Manage_risks]] | [[Category:Manage_risks]] | ||
Revision as of 13:58, 21 June 2022
(OIS).
A fixed rate interest rate swap against a floating rate index such as SONIA, EURONIA, €STR, SOFR or the Federal Funds rate.
The two parties to the OIS agree to exchange the difference between the interest accrued at an agreed fixed interest rate for a fixed period (for example 3 months) on an agreed notional amount, and the interest accrued on the same amount, by compounding the reference index daily over the term of the swap.
Settlement is made net at an agreed date after maturity (in the sterling market settlement is on the maturity date) so the principal never changes hands.
Historically, the LIBOR-OIS spread was the difference between LIBOR and the OIS rate for the same period and was used as an indicator of the credit standing or riskiness of the banking sector.
The reason for this was that the LIBOR rate included a credit element for the risk in lending to a bank, whereas the OIS swap rate has a much reduced credit component since no principal changes hands in a swap.
Sometimes written Overnight index swap.
