Overnight indexed swap

An overnight indexed swap (OIS) is an interest rate swap where the periodic floating rate of the swap is equal to the geometric average of an overnight index (i.e., a published interest rate which is also called Overnight Rate) over every day of the payment period. The index is typically an interest rate considered less risky than the corresponding interbank rate (LIBOR).^[1]

In the United States, OIS rates are calculated by reference to daily federal funds rate.

OIS rates (or, in particular, the difference or "spread" between OIS rates and LIBOR) are an important measure of risk and liquidity in the money market,^[2] considered by many, including former US Federal Reserve chairman Alan Greenspan, to be a strong indicator for the relative stress in the money markets.^[3] A higher spread is typically interpreted as indication of a decreased willingness to lend by major banks, while a lower spread indicates higher liquidity in the market. As such, the spread can be viewed as indication of banks' perception of the creditworthiness of other financial institutions and the general availability of funds for lending purposes.^[4]

The LIBOR-OIS spread has historically hovered around 10 basis points. However, in the midst of the financial crisis of 2007–2010, the spread spiked to an all-time high of 364 basis points in October 2008, indicating a severe credit crunch. Since that time the spread has declined erratically but substantially, dropping below 100 basis points in mid-January 2009 and returning to 10-15 basis points by September 2009.^[5]

See also

• Ted spread
• Libor-OIS spread

References

1. ^ CSFB Zurich note on OIS
2. ^ Zeng, Min (September 20, 2008), "Money Flows Back to Commercial Paper", The Wall Street Journal, http://online.wsj.com/article/SB122182900317256613.html 
3. ^ Brown, Matthew; Finch, Gavin (January 12, 2009), "Libor for Dollars Slides Most Since Dec. 17 on Cash Injections", Bloomberg.com, http://www.bloomberg.com/apps/news?pid=20601087&sid=aOxAa22fbxKU 
4. ^ Capo McCormick, Liz (January 24, 2008), "Interest-Rate Derivatives Signal Banks Still Reluctant to Lend", Bloomberg.com, http://www.bloomberg.com/apps/news?pid=20601009&sid=angq2PsOg5Io 
5. ^ "3 MO LIBOR - OIS SPREAD", Bloomberg.com, January 12, 2009, http://www.bloomberg.com/apps/quote?ticker=.LOIS3:IND 

External links

• LIBOR-OIS spread chart over past year