Interest Rate Swaps · Swaps Trading Guide

An overnight index swap exchanges a fixed leg against an overnight benchmark accumulated across a period. The accumulation rules matter as much as the rate name.

Accumulate daily observations

An overnight index swap, or OIS, references an overnight rate rather than assuming one rate fixed for the whole period. Under a compounded convention, each daily rate contributes over its applicable day count. Weekends and holidays may give one observation several calendar days of weight. The exact contract determines how observation and payment dates align.

Use a small compounding example

For an intentionally simplified two day period with a 360 day basis, suppose the rates are 3.6% and 7.2%. The accumulation factor is 1.0001 × 1.0002 = 1.00030002. Interest on $1 million is $300.02. Simply adding the two daily interest amounts gives $300, illustrating the small compounding difference in this example.

Use the right index window

The New York Fed publishes a SOFR Index that can support compounded calculations across suitable dates. Its rolling averages are not automatically the correct rate for an arbitrary swap period. Match the contract dates and observation convention. A lookback, payment delay or other adjustment can make a convenient published number an imperfect substitute.

Keep forecasts separate

The accrued part of a period uses observed data, while future days require projections. Update the split as time passes. A valuation may change even if yesterday’s fixing is unchanged because expectations for the remaining days have moved. Retain the fixing history and calculation conventions so a later cash reconciliation can be reproduced.

Try it yourself

An illustrative accumulation factor is 1.0025 for a completed period on $2 million. What is the floating interest amount?

Show the worked answer

Interest is $2,000,000 × (1.0025 minus 1) = $5,000. Annualising that return would require the applicable accrual fraction.

Further reading

Educational material, not a recommendation to transact. Numerical examples are hypothetical and simplify contract terms. Access, documentation, collateral and regulatory requirements depend on the product, jurisdiction and counterparties.

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