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Understanding the LIBOR-OIS Spread |
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Tuesday, 30 September 2008 15:05
Written by S. Wade Hansen
Intermarket Analysis
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Why Do Analysts Watch the LIBOR-OIS Spread? Market analysts are always looking for indicators that can give them a glimpse into what is happening in the market so they can get an idea of what is going to happen in the future. The LIBOR-OIS spread gives analysts just such a glimpse into the health of the global credit markets. [Click on the video player below to watch the video and learn more.] | | | | | Chart: LIBOR | | | | Check out the chart of LIBOR. 
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| | | LIBOR-OIS Spread The LIBOR-OIS spread is a comparison between the London Interbank Offered Rate (LIBOR) and the overnight index swap (OIS) rate. You see, analysts aren't too concerned with the nominal value of each of these rates. What they are concerned with is the relationship between these two rates. Typically, LIBOR is higher than the overnight index swap rate, but knowing that alone isn't enough. You need to know what the spread is. 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). To get an idea of how the spread between these two numbers can widen and contract, take a look at the following two charts of LIBOR and the OIS rate: 
3-Month LIBOR Rate (Source: Bloomberg) 
3-Month OIS Rate (Source: Bloomberg) Article continues on the next page... Page 1 | Page 2 | Video  To learn more, click here to watch the video on Understanding the LIBOR-OIS Spread.
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LIBOR-OIS Spread Video
