Resources

Overnight Indexed Swaps (OIS)

Introduction

Similar to a LIBOR-based swap, an overnight index swap (OIS) is an interest rate swap whose floating leg is tied to an overnight rate, compounded over a specified term - a common example is the overnight Federal Funds rate which is published daily by the Federal Reserve in the US. Overnight rates include EONIA (EUR), SONIA (GBP), CHOIS (CHF), and TONAR (JPY).

There has recently been a shift away from LIBOR-based swaps to OIS indexed swaps as the OIS-LIBOR spread has increased. This spread became most noticeable during the credit crisis. OIS discounting is now the market standard for pricing collateralized deals (in the major currencies listed above) and is being mandated by clearing houses.

As in an interest rate swap, OIS contracts involve the exchange of only the interest payments, the principal amount is notional. That is, the two parties agree to exchange, on the agreed notional amount, the difference between interest accrued at the fixed rate and interest accrued through daily compounding (or geometric averaging) of the floating overnight index rate.

With the market for OIS being highly liquid for certain primary currencies as well as quoted for a broad range of maturities, an OIS-based discount curve can be readily bootstrapped using traditional methods and used to discount collateralized derivative transactions.

Analysis Supported

FINCAD Analytics Suite provides two OIS functions (fcOISCurve and fcOvernightIndexSwap) that can be used for the following:

  • Construction an OIS discount factor curve by bootstrapping from Spot OIS and OIS swap rates.
  • Calculation of the fair value and risk statistics of an OIS.

To evaluate an FINCAD product that can value an Overnight Index Swap, contact a FINCAD Representative