How are OIS swaps priced?

How are OIS swaps priced?

The price of the swap is determined by finding out the market values of the implicit fixed rate and the floating rate bonds. The same three step methodology and formulas in EXCEL described above for LIBOR discounting is used to determine the price of each bond.

What is a SOFR OIS swap?

Overnight Index Swap referencing SOFR. An OIS (Overnight Index Swap) is a swap consisting of two legs: a fixed leg that pays a fixed rate over regular intervals and a floating (or overnight) leg that pays a variable rate over the same intervals as the fixed leg.

What are OIS contracts?

An Overnight Index Swap (OIS) is a financial contract between two parties, which agree to exchange a payment at the end of the contract based on the difference between a fixed rate and the overnight index rate.

Why is OIS risk free?

The OIS rate is generally considered to be a good proxy for a term risk-free rate, and is therefore less risky than the corresponding IBOR, because there is less credit risk associated with it due to the parties to an OIS not being required to exchange the principal amount during the life of the transaction and only …

How is OIS curve build?

OIS Curve Construction and Bootstrapping Overview The most liquid instruments that can be used to build OIS curve are Fed Fund Futures and OIS swaps that pay at the daily compounded Fed Fund rate. However, Fed Fund Futures are currently only liquid up to two years and OIS swaps up to ten years.

Is SOFR and OIS same?

At the same time, the difference between the discount factors of OIS and SOFR does not change much between the two dates. However, the discount factors of the SOFR rate noticeably changes between the two dates – even larger than the difference between the SOFR and OIS discount factor.

How does OIS discounting work?

OIS discounting is the standard methodology for valuing cash-collateralised derivatives contracts using overnight index swap rates – the rate that would be paid by the collateral receiver to the poster. Previously, Libor was used to discount all derivatives.

Why OIS is risk free?

Is OIS a risk-free rate?

How is OIS curve construction?

The central tenet of curve construction under OIS discounting is to bootstrap multiple curves simultaneously. One needs two term structure inputs for curve construction under OIS discounting: a term structure of OIS instruments and a term structure of swaps.