What Is an Overnight Index Swap?

The overnight index swaps in English are called Overnight Indexed Swaps, or OIS for short. It is an interest rate swap that swaps overnight interest rates into several fixed rates. It is a measure of market expectations of central bank interest rates. The Bank for International Settlements said that "under normal market conditions" overnight index swaps tend to be lower than Libor (British Interbank Offered Rate).

Overnight Index Swap

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The overnight index swaps in English are called Overnight Indexed Swaps, or OIS for short. It is an interest rate swap that swaps overnight interest rates into several fixed rates. It is a measure of market expectations of central bank interest rates. The Bank for International Settlements said that "under normal market conditions" overnight index swaps tend to be lower than Libor (British Interbank Offered Rate).

The duration of OIS usually does not exceed one year, and there are also one month, one week, or even several days. Secondly, the fixed interest rate is the average of the inter-bank lending rate and is published daily. For dollar swaps, the floating interest rate is the actual federal funds rate per day. Interest is compounded daily and settled on the due date.

Overnight index swaps provide more accurate levels of interbank lending rates and are a tradable price. The Fed's minimum bid line for short-term bidding is to use a one-month overnight index swap.