Overnight Indexed Swaps (OIS)
Introduction
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. 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. The tenor of these swaps usually ranges from one month to two years.
There is usually one payment for swaps with maturities of one year or less. The floating leg of the longer maturity swaps pays the OIS rate of a specific tenor. In general, the OIS swap agreement stipulates all of the conditions and definitions required to administer the swap including the notional principal amount, fixed coupon, accrual methods, day count methods, effective date, terminating date, cash flow frequency, and overnight fixings.
Technical Details
To value an OIS, the present value of cash flows of each leg of the swap must be determined. The present value of each of the cash flows of the swap is the difference between the values of the two streams of cash flows.
OIS Discount Factor Curve
The OIS discount factor curve is built by bootstrapping market quotes from the supplied short maturity OIS rates, long maturity OIS rates, or both in order of increasing maturity.
Analysis Supported
FINCAD 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 FINCAD OIS functions, please request a customized demo or a free evaluation.