How does an OIS swap work?

An Overnight Index Swap (OIS) is a derivative instrument (a security where the returns are linked to the performance of an underlying instrument) where returns under a fixed rate asset are swapped against a pre-determined published index of a daily overnight reference rate for an agreed period of time.

What is a OIS forward swap?

Overnight Index Swap (OIS) is an Interest Rate Swap transaction that involving the overnight rate being exchanged for a fixed interest rate for certain period of time or vice versa.

How do you value an OIS swap?

4. Pricing Interest Rate Swaps using OIS swap pricing / OIS discounting

  1. Step 1 – Obtain the term structure.
  2. Step 2 – Calculate discount factors.
  3. Step 3 – Calculate implied LIBOR forward rates.
  4. Step 4a: Value the IRS as a combination of bonds.
  5. Step 4b: Value the IRS as a series of forward contracts on the reference rate.

What is the difference between OIS and SOFR?

On most days, the spreads between SOFR term rates and federal funds OIS rates are considerably smaller than the spread between the overnight SOFR rate and the federal funds effective rate. Like federal funds OIS, term SOFR rates, which do not embed credit risk premiums, are consistently lower than term LIBOR rates.

Why is OIS risk free?

The OIS rate is generally considered to be a good proxy for a term risk-free rate, and is therefore less risky than the corresponding IBOR, because there is less credit risk associated with it due to the parties to an OIS not being required to exchange the principal amount during the life of the transaction and only …

Is SONIA an OIS?

The SONIA OIS market is currently undergoing a transition. In March 2021, the Financial Conduct Authority (FCA) and ICE Benchmark Administration (the administrator of Libor) announced that publication for all GBP Libor tenors would cease after Friday 31 December 2021.

What is the difference between Fed funds and OIS?

federal funds rate or the euro overnight index average, are exchanged for a fixed rate over the contract period. The OIS rate is the fixed leg of such a swap, and captures the expected path of the O/N rate over the contract term.

What is OIS discounting?

OIS discounting is the standard methodology for valuing cash-collateralised derivatives contracts using overnight index swap rates – the rate that would be paid by the collateral receiver to the poster. Previously, Libor was used to discount all derivatives.