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Using OIS Rates for Longer-Term USD Swap Spreads

Article Quant Q&A · Author: findingthefacts
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Summary

The note distinguishes the Federal Funds rate from the Overnight Index Swap rate when analyzing USD interest rate swaps. The Federal Funds rate is an overnight rate, while an OIS rate represents the fixed leg of a swap against compounded daily Federal Funds payments. The answer illustrates the contract's exposure to changes in the overnight rate: the floating payments rise or fall as Federal Funds changes.

For a 0–5 year interest rate swap spread, the answer recommends using OIS rates when a longer-term rate is needed, since OIS quotes extend across maturities. It reserves the Federal Funds rate for the overnight tenor. The note mentions that longer-dated OIS quotes may have limited liquidity, and does not examine market conventions, alternative benchmarks, or how liquidity affects spread comparisons.

Key ideas

  • An OIS exchanges a fixed rate for daily floating Federal Funds payments.
  • The Federal Funds rate is an overnight quote, while OIS rates provide term quotes.
  • The answer points to OIS rates for longer-term USD rate comparisons such as a 0–5 year spread.
  • Liquidity may be limited for longer-dated OIS maturities, which can affect their usefulness.

Tags

Fixed incomeUS markets
Full text
# Question on OIS and fed funds rate


# Question on OIS and fed funds rate












If i am considering the 0-5 year irs spread for the USD market, would it be more accurate to use the fed funds rate or the OIS rate? I believe the OIS rate is calculated based on the fed funds rate, but am not sure how the dynamics of the relation work.

## Answer by jleahy (score 2)

https://quant.stackexchange.com/a/4016

The OIS rate is simply the price of an interest rate swap where you're swapping the fed funds rate (paid daily) for a fixed rate. For example if a 3 month OIS pays 2%, and the fed funds rate is currently 0.5% then what we're saying is you can enter into a swap (at zero price) where you will receive 2% and pay fed funds. If the fed funds rate goes up you pay more, if it goes down you pay less.

The fed funds rate is quoted only as an overnight rate; if you're looking for a USD overnight rate you should use that. If you want a longer rate then you should look at OIS rates, which are quoted all the way out to 50 years (although I doubt there's much liquidity out there, it does appear on Bloomberg).

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