What does OIS rate mean?
overnight indexed swap
An overnight indexed swap (OIS) is an interest rate swap (IRS) over some given term, e.g. 10Y, where the periodic fixed payments are tied to a given fixed rate while the periodic floating payments are tied to a floating rate calculated from a daily compounded overnight rate over the floating coupon period.
How is OIS rate calculated?
The rate that overnight index swaps use must be divided by 360 and added to 1. For example, if this rate is 0.0053% the result is: 0.0053% / 360 + 1 = 1.00001472. In step 8, raise this rate the power of the number of days in the loan and multiply by the principal: 1.00001472^1 x $1,000,000 = $1,000,014.72.
Why OIS is better than LIBOR?
The major reason for switching from using LIBOR to the OIS as a term structure for pricing interest rate swaps is that OIS discounting better reflects the counterparty credit risk in a collateralized interest rate swap. In recent years, the LIBOR-OIS spread has persistently widened, particularly after August 2007.
Why OIS is better than Libor?
What is OIS in India?
The OIS rate is a measure of market expectation of the money market rates. The Interest rate swaps in India is relatively new, with the first interest rate swap being traded in July 1999. Among the Interest rate swaps, the OIS is the most popular and liquid.
How is OIS discounting related to the yield curve?
This is referred to as “OIS discounting” or “CSA discounting.”. An overnight yield curve can be derived from overnight index swaps (OIS). Prior to the financial crisis, there was little difference between the overnight yield curve and the yield curve derived from swap rates.
How is CSA discounting different from OIS discounting?
Without the CSA agreement, the trade will get priced at the highest level of counterparty risk and the CSA charge will be significant. Often if there is good GC-eligible asset to collateralize the trades (among major firms) then the discounting is off of OIS curve, hence “OIS discounting”.
How is OIS discounting applied to call options?
OIS Discounting and Options. If options are collateralized and the option margin earns an overnight rate, OIS discounting can be applied. Call options (or interest rate caplets) will have lower values and put options (or interest rate floorlets) will have higher values.
What’s the difference between LIBOR and OIS discounts?
Step 1: Obtain the term structure. For LIBOR discounting this means cash market rates (for LIBOR deposits) for the first twelve months and the at-market swap fixed rates for the remaining tenor. For OIS discounting this means the OIS fixed rates for the tenor.