How is LIBOR-OIS spread calculated?

To calculate the LIBOR-OIS spread, you simply subtract the overnight index swap rate from the three-month LIBOR rate. For instance if the three-month LIBOR rate is at 3.25 percent and the overnight index swap rate is at 2.50 percent, the LIBOR-OIS spread is 0.75 percent, or 75 basis points (3.25 – 2.50 = 0.75).

What drives LIBOR-OIS spread?

The literature categorizes the Libor–OIS spread drivers into four main risk categories: credit and default risk, counterparty risk, market volatility, and liquidity risk.

What is SOFR OIS?

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.

Is OIS a risk-free rate?

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 …

Is LIBOR higher than OIS?

The fixed rate of OIS is typically an interest rate considered less risky than the corresponding interbank rate (LIBOR) because there is limited counterparty risk. The spread between the two rates is considered to be a measure of health of the banking system.

What is a spread in OIS trading?

In other words, a spread introduces convexity. An interesting point is that the above equation means that an OIS has the same price as the corresponding fixed-to-floating swap where the floating index is the term (eg Libor) rate spanning the compounding period of the overnight index.

What does OIS mean?

Overnight Index Swaps (OIS) Overnight Index Swaps (OIS) are instruments that allow financial institutions to swap the interest rates they are paying without having to refinance or change the terms of the loans they have taken from other financial institutions.

What is an OIS swap?

The OIS is a swap derived from the overnight rate, which is generally fixed by the local central bank. The OIS allows LIBOR-based banks to borrow at a fixed rate of interest over the same period. In the United States, the spread is based on the LIBOR Eurodollar rate and the Federal Reserve’s Fed Funds rate.

What is LIBOR-OIS spread?

The term Libor-OIS spread is assumed to be a measure of the health of banks because it reflects what banks believe is the risk of default associated with lending to other banks.