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Overnight Index Swap

Overnight Index Swap:

Indian overnight index swap (OIS) rates rose to their highest levels in 10 months due to offshore payments and triggering of stop losses.

  • Overnight Index Swap is a derivative instrument where returns under a fixed-rate asset are swapped against a predetermined published index of a daily overnight reference rate for an agreed period of time.
  • The primary purpose of an OIS is to manage interest rate risk, particularly the risk associated with fluctuations in the overnight lending rate.
  • An overnight index swap rate is calculated each day.
  • This rate is based on the average interest rate institutions with loans based on the overnight rate have paid for that day.
  • These are instruments that allow financial institutions to swap the interest rates they are paying without having to refinance or change the terms of their existing loans.
  • Typically, when two financial institutions create an overnight index swap, one of the institutions is swapping an overnight (floating) interest rate, and the other institution is swapping a fixed short-term interest rate.
  • To get the swap rolling, both firms would agree to continue servicing their loans, but at the end of a specified time period, whoever ends up paying less interest will make up the difference to the other firm.