Q. What is an 'Overnight Index Swap (OIS)', recently seen in news?
Answer:
A derivative instrument that swaps fixed-rate returns with a daily overnight index
Notes: The Deputy Governor of the Reserve Bank of India (RBI) mentioned that the RBI is reviewing the foreign investment limit in the overnight index swap (OIS) market. OIS is a derivative that swaps fixed interest rates for a predetermined overnight index rate to manage interest rate risk. The OIS rate is calculated daily based on the average overnight lending rate. It allows financial institutions to swap interest rates without refinancing their loans.
One institution swaps a floating overnight rate while the other swaps a fixed short-term rate, settling differences at the end of the agreement.