What is the News ?

Recently, Indian overnight index swap (OIS) rates have surged to their highest levels in a span of 10 months. This increase has been attributed to offshore payments and the triggering of stop-loss orders.

Facts About:

• An Overnight Index Swap (OIS) is a financial tool that involves exchanging returns from a fixed-rate asset for a predetermined daily overnight reference rate index for an agreed-upon duration.
• The primary goal of OIS is to mitigate interest rate risk, specifically the risk linked to changes in the overnight lending rate.
• An OIS rate is computed daily, and it is based on the average interest rate that institutions with loans tied to the overnight rate have paid for that particular day.

How does an OIS Operate:

• OIS instruments enable financial institutions to exchange the interest rates they are currently paying, all without the need to refinance or alter the terms of their existing loans.
• In a typical overnight index swap arrangement, one financial institution swaps an overnight (floating) interest rate, while the other swaps a fixed short-term interest rate.
• To initiate the swap, both institutions agree to maintain their loan obligations as usual.
• However, at the end of an agreed-upon timeframe, the institution that ends up paying less interest will compensate the other institution for the difference.