An overnight indexed swap OIS is an interest rate swap where the periodic floating payment is generally based on a return calculated from a daily compound interest investment. The reference for a daily compounded rate is an overnight rate or overnight index rate and the exact averaging formula depends on the type of such rate.

The index rate is typically the rate for overnight unsecured lending between banks, for example the Federal funds rate for US dollars, Eonia for Euros or Sonia for sterling. The fixed rate of OIS is typically an interest rate considered less risky than the corresponding interbank rate LIBOR because there is limited counterparty risk. The LIBOR—OIS spread is the difference between LIBOR and the OIS rates.

The spread between the two rates is considered to be a measure of health of the banking system. 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. The LIBOR—OIS spread has historically hovered around 10 basis points bps.

However, in the midst of the financial crisis of —the spread spiked to an all-time high of basis points in Octoberindicating a severe credit crunch. Since that time the spread has declined erratically but substantially, dropping below basis points in mid-January and returning to 10—15 basis points by September Three-month LIBOR is generally a floating rate of financing, which fluctuates depending on how risky a lending bank feels about a borrowing bank.

The OIS is a swap derived from the overnight rate, which is generally fixed by the local central bank.

The OIS allows LIBOR-based banks to borrow at a fixed rate of interest over the same period. In the United States, the spread is based fx volatility arbitrage the LIBOR Eurodollar rate and the Federal Reserve's Fed Funds rate. LIBOR is risky in the sense that the lending bank loans cash to the borrowing bank, and the OIS is stable in the sense that both counterparties only swap the floating rate earnest money deposit letter of intent interest for the fixed rate of interest.

The spread between the two is, therefore, a measure of stock option plan accelerated vesting likely borrowing banks will default.

A Quick Look At Overnight FX Shenanigans | Seeking Alpha

This reflects counterparty credit risk premiums in contrast to liquidity risk premiums. In the United States, the LIBOR—OIS spread generally maintains around 10 bps.

This changed abruptly, as the spread jumped to a rate of around 50 bps in early August as the financial markets began to price in a higher risk environment.

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.

Overnight indexed swap - Wikipedia

As markets improved, the spread fell and fx options overnight of Octoberstood at 10 bps once again, only to rise again as struggles of the PIIGS countries threatened European canadian index market stock. Whilst liquidity is provided in excess by monetary policy authorities the LIBOR-OIS is less of an indicator of stress.

From Wikipedia, the free encyclopedia. Economic Synopses, Number 25, Federal Reserve Bank of St. The Wall Street Journal. Credit spread Debit spread Exercise Expiration Moneyness Open interest Pin risk Risk-free interest rate Strike price the Greeks Volatility. Bond option Call Employee stock option Fixed income FX Option styles Put Warrants.

Asian Barrier Basket Binary Chooser Cliquet Commodore Compound Forward start Interest rate Lookback Mountain range Rainbow Swaption. Collar Covered call Fence Iron butterfly Iron condor Straddle Strangle Protective put Risk reversal. Back Bear Box Bull Butterfly Calendar Diagonal Intermarket Ratio Vertical.

Binomial Black Black—Scholes model Finite difference Garman-Kohlhagen Margrabe's formula Put—call parity Simulation Real options valuation Trinomial Vanna—Volga pricing. Amortising Asset Basis Conditional variance Constant maturity Correlation Credit default Currency Dividend Equity Forex Inflation Interest rate Overnight indexed Total return Variance Volatility Year-on-Year Inflation-Indexed Zero-Coupon Inflation-Indexed. Contango Currency future Dividend future Forward market Forward price Forwards pricing Forward rate Futures pricing Interest rate future Margin Normal backwardation Single-stock futures Slippage Stock market index future.

Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative.

Overnight Trading

Collateralized debt obligation CDO Constant proportion portfolio insurance Contract for difference Credit-linked note CLN Credit default option Credit derivative Equity-linked note ELN Equity derivative Foreign exchange derivative Fund derivative Interest rate derivative Mortgage-backed security Power reverse dual-currency note PRDC.

Consumer debt Corporate debt Government debt Great Recession Municipal debt Tax policy. Retrieved from " https: Derivatives finance Interbank offered rates. Navigation menu Personal tools Not logged in Talk Contributions Create account Log in. Views Read Edit View history. Navigation Main page Contents Featured content Current events Random article Donate to Wikipedia Wikipedia store.

Interaction Help About Wikipedia Community portal Recent changes Contact page. Tools What links here Related changes Upload file Special pages Permanent link Page information Wikidata item Cite this page. This page was last edited on 14 Marchat Text is available under the Creative Commons Attribution-ShareAlike License ; additional terms may apply.

By using this site, you agree to the Terms of Use and Privacy Policy. Privacy policy About Wikipedia Disclaimers Contact Wikipedia Developers Cookie statement Mobile view.

Terms Credit spread Debit spread Exercise Expiration Moneyness Open interest Pin risk Risk-free interest rate Strike price the Greeks Volatility.