Description:-
When two financial institutions create an overnight index swap (OIS), one of the institutions is swapping an overnight interest rate and the other institution is swapping a fixed short-term interest rate. The interest of the overnight rate portion of the swap is compounded and paid at reset dates with the fixed leg being accounted for in the swap’s value to each party.
Why are they traded?
A bank pays floating rate of interest on deposits (assets) and earns a fixed rate of interest on loans. The bank could use a fixed-pay swap (pay a fixed rate and receive a floating rate) to convert its fixed-rate loans into floating-rate assets.
Some companies have a comparative advantage in acquiring certain types of financing. For example, consider a well-known U.S. firm that wants to expand its operations into Europe, where it is less known. It will likely receive more favorable financing terms in the U.S. By then using a currency swap, the firm ends with the euros it needs to fund its expansion.
Life cycle events: –
No upfront fees. Termination fees applicable on early terminations.
Interest amounts (Fixed and floating) are exchanged depending on the frequency agreed on the trade.(e.g. daily, weekly, monthly, quarterly, yearly).
OTCWIRE 