Overnight Index Swap

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Definition of 'Overnight Index Swap'

An overnight index swap (OIS) is a financial derivative contract in which two parties agree to exchange interest payments based on a floating rate index for a specified period of time. The floating rate index is typically the overnight rate, which is the interest rate that banks charge each other for overnight loans.

The OIS is a type of interest rate swap, which is a contract in which two parties agree to exchange interest payments on a notional principal amount. In an OIS, the notional principal amount is typically a large amount of money, such as $100 million or more.

The OIS is a zero-sum game, which means that one party's gain is equal to the other party's loss. The party that pays the floating rate interest rate will receive the fixed rate interest rate, and vice versa.

The OIS is used to manage interest rate risk. For example, a company that has a floating-rate loan may use an OIS to lock in a fixed interest rate for a specified period of time. This can help the company to protect itself from rising interest rates.

The OIS is also used for speculation. For example, a trader may buy an OIS if they believe that interest rates will fall. This will allow the trader to profit from the difference between the fixed rate and the floating rate.

The OIS is a relatively new financial instrument, but it has become increasingly popular in recent years. This is due to the fact that it is a versatile tool that can be used for a variety of purposes.

Here are some additional details about OIS:

* The OIS is typically traded over-the-counter (OTC), which means that it is not traded on an exchange.
* The OIS is a standardized contract, which means that the terms of the contract are the same for all parties.
* The OIS is typically settled in cash, which means that the parties exchange cash payments on the settlement date.
* The OIS is a liquid instrument, which means that it can be easily traded.

The OIS is a complex financial instrument, and it is important to understand the risks involved before trading in OIS.

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