Quick Definition

An Overnight Index Swap (OIS) is a financial derivative where two parties agree to exchange, over a set period, the interest earned on a principal amount calculated using a daily overnight rate for a fixed rate of interest.

Formula

Examples

• 1A bank swaps its variable overnight rate for a fixed rate with another financial institution to hedge against interest rate fluctuations.
• 2An investment firm uses an OIS to lock in a lower interest rate for funding overnight operations, improving its cost predictability.
• 3A central bank might engage in OIS to manage its monetary policy effectively by influencing short-term interest rates.
• 4Corporations use OIS to manage the risk associated with financing projects that require overnight funding.

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