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Understanding Overnight Index Swaps (OIS)

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OIS Discounting Impact on Interest Rate Swaps and Cross-Currency Swaps In the case of interest rate swaps and cross-currency swaps, the difference in valuation will depend on whether the swap is. An overnight index swap uses an overnight rate index, such as the federal funds rate, as the underlying rate for its floating leg, while the fixed leg would be set at a rate agreed on by the.

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This is market practice since The OIS rate is used because it is close to the typical interest rate paid on the collateral that is held. It becomes the best estimate of the risk-neutral risk-free rate in a world where the collateral has effectively eliminated counterparty risk. Secured and unsecured refers to lending. It is a different animal. For example my name is Noob Rademayer, I am not a bank so I can't lend or borrow FF in the interbank market, but I can bet on the rate at which banks do.

For example I could bet that the cost of borrowing 1,, in FF over the next 30 days will go up. To let me make these bets the counterparty may require me to put up a small amount of margin, however I still would not call that secured lending, it is just the normal margin for any derivative trade nowadays enough to cover the loss if something goes wrong, maybe USD, not the full notional.

On the other hand if I wanted to borrow 1 million USD from my broker I would have to put up more than 1 million in marketable securities; that is a secured loan. By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service , privacy policy and cookie policy , and that your continued use of the website is subject to these policies.

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Within months, the Bank of England was forced to rescue Northern Rock from failure. The spread continued to maintain historically high levels as the crisis continued to unfold. As markets improved, the spread fell and as of October , stood at 10 bps once again, only to rise again as struggles of the PIIGS countries threatened European banks.

The spread varied from 10 to 50 bps up through February From Wikipedia, the free encyclopedia. Economic Synopses, Number 25, Federal Reserve Bank of St. The Wall Street Journal. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative.

Bank rate Effective interest rate Interbank lending market Overnight indexed swap Overnight rate. Retrieved from " https: Derivatives finance Reference rates. Views Read Edit View history. This page was last edited on 30 May , at

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The spread continued to maintain historically high levels as the crisis continued to unfold.

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