Overnight Index Swap (OIS)
29/08/08 20:01
Here, or in Pro Traders Club video reviews, you will
often hear me refer to the Overnight Index Swaps (OIS
Market) and their relation to the market pricing in
rate hikes/cuts for a specific region. Here is a good
article i came across that can help to explain the
instrument. I don't know who wrote the article, so
cannot credit the appropriate source. It may be a
little heavy for some, but you'll get the general
idea....
Overnight index swap is an interest rate swap involving the overnight rate being exchanged for some fixed interest rate. Generally short-term, the interest of the overnight rate portion of the swap is compounded and paid at maturity.
An overnight indexed swap (OIS) is a fixed/floating interest rate swap with the floating leg tied to a published index of a daily overnight rate reference. The term ranges from one week to two years (sometimes more). The two parties agree to exchange at maturity, on the agreed notional amount, the difference between interest accrued at the agreed fixed rate and interest accrued through geometric averaging of the floating index rate.
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Chris