The overnight index swap (OIS) market is quite large, and the movements in this market can provide a lot of information for economists and analysts who are trying to understand what is happening in the global financial markets. One of the key pieces of information analysts watch is the interest rate the institutions who have loans with variable interest rates are paying.
The question is, how do you determine what rate to use when each institution is paying a slightly different rate based on what time of day they have to determine their payment. You see, the overnight rate in constantly changing, and you will pay a different interest rate at 6:00 am than you will pay at 11:00 am.
To resolve this issue, an overnight index swap rate is calculated each day. This rate is based on the average interest rate institutions with loans based on the overnight rate have paid for that day.
What Does the Overnight Index Swap Rate Tell Us?
By itself, the overnight index swap rate doesn't tell us much—other than what the overnight rate is. However, when you combine the overnight index swap rate with another indicator, like LIBOR, and create a spread like the LIBOR OIS spread, you can get a glimpse into the health of the global credit markets.
Check out the video below to learn more about overnight index swaps (OIS) and the overnight index swap rate.
