How OIS Swaps Differ from Basis Swaps and Their Curves

Summary

The document distinguishes a basis swap from an overnight index swap. A basis swap is described broadly as an exchange of one floating interest rate for another; its specific meaning depends on which indices or rates form the two legs. An overnight index swap instead exchanges a fixed rate for a floating rate based on an average of overnight rates over the contract tenor.

The example uses the Federal Funds Rate: a three-month OIS rate can be interpreted approximately as the market-implied average overnight rate over that period. An OIS curve plots such swap rates across tenors. The explanation helps distinguish the instruments and the information represented by their curves, but it does not define a particular basis swap, explain curve construction or discounting, or address pricing conventions and risk. The market-implied rate is an expectation embedded in pricing, not a guaranteed forecast of realized overnight rates.

Key ideas

• A basis swap exchanges one floating rate for another, with details depending on the rates involved.
• An OIS exchanges a fixed rate for a floating rate based on overnight rates averaged over the tenor.
• An OIS rate can be interpreted as a market-implied average overnight rate for its tenor.
• An OIS curve plots OIS rates across contract tenors.
• Market-implied rates are not guarantees of future realized rates.

Tags

# What is the difference between OIS Swap vs Basis Swap?


# What is the difference between OIS Swap vs Basis Swap?












What is the use of OIS Swap Curve vs. Basis Swap Curve?

## Answer by Alex C (score 12, accepted)

https://quant.stackexchange.com/a/27808

A Basis swap is a broad category of swaps where you exchange one floating rate against another floating rate. Without knowing the specific rates involved it is difficult to say more.

An OIS Swap is an Overnight Index Swap, where you exchange a fixed rate against an average of the overnight rates for the tenor of the swap. For example, if the ON rate is Federal Funds Rate (FFR), then a 3 month OIS swap rate is essentially the market's guess of where the average overnight FFR will be during the next 3 months. (The overnight rate changes on a daily basis so it is of course a floating rate). The OIS curve plots these OIS rates against the tenor.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.