An overnight index swap (OIS) is an interest rate swap where the OIS leg is set by reference to a daily overnight reference rate.
The daily overnight reference rate used for each supported currency is the established index for that currency—so for GBP this is SONIA, for JPY it is MUTAN, etc.
The non-OIS leg of the instrument can be based on a fixed leg or a float leg. If it is based on a:
Fixed rate, then the daily overnight reference rate of the OIS leg is compounded for the duration of the payment period to give the final payment.
Floating rate, then by default the daily overnight reference rate of the OIS leg is compounded, but you can choose to set it to use the weighted average method instead.
Pricing an Overnight Indexed Swap in SDX Interest Rates
When pricing an overnight indexed swap in SDX Interest Rates note that:
If you set the non-OIS leg to:
A fixed rate, then the OIS leg is daily compounded (as seen at 1 in Figure 1). You cannot edit this setting.
In addition, if you choose to define a spread (using the Spread field added for this leg as seen at 2 in Figure 1), you can then also select the type of compounding you want for the spread. You do this using the Compounding dropdown list, where you can choose None (this means that SD first computes the compounded OIS daily rate and only then adds the spread to this value) or Spread (this means that SD first adds the spread to the daily OIS rate and only then compounds it).
A floating rate, then by default the daily OIS rate for the OIS leg is compounded. However, if required you can choose to apply the weighted average method to the daily OIS rate instead. You control this using the Method dropdown list.
Note that when the compounding method is activated for the OIS leg, you can then also control the type of compounding that will be applied to any defined spread. You do this using the Compounding dropdown list, where you can choose None (this means that SD first computes the compounded OIS daily rate and only then adds the spread to this value) or Spread (this means that SD first adds the spread to the daily OIS rate and only then compounds it). See also Compounding.
Figure 1: Controlling the Compounding of the Spread for the OIS Leg
For each currency, the market data for the overnight index swaps for specific tenors is displayed in the OIS curve. This data is based on the relevant overnight index for the selected currency. This curve is accessed by clicking the Curves tab > OIS Curves tab on the left-hand menu.
For each currency the maximum swap length cannot be greater than the longest available swap rate (as seen in the OIS curve). For most currencies the maximum swap rate is one year, although for the euro it is 50 years, for the Indian rupee it is 10 years and for the English pound it is 30 years.
SDX Interest Rates, in line with market convention, uses different yield curves for calculating each of the following rates when pricing overnight index swaps:
Forecasted rates (i.e., the projection of the OIS floating rate) are calculated using an OIS curve (either the system's default OIS curve for the currency or one you saved yourself in the OIS Curve page). For more information on the OIS curve see OIS Curve.
These rates can be seen for the OIS leg in the Swap Cash Flow Dates window in the Implied Rates column.
Discounting rates are taken from the OIS curve (either the system's default OIS curve for the currency or one you saved yourself in the OIS Curve page). For more information on the OIS Curve page, see OIS Curve.
These rates can be seen for both legs in the Swap Cash Flow Dates window in the Discount Factor column.