Overnight Index Swap (OIS)

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An Overnight Index Swap (OIS) is an interest rate derivative in which two parties agree to exchange (swap) a specific fixed interest rate obligation for a floating rate obligation linked to the overnight rate.

This instrument is popular amongst financial institutions as a way to hedge risk, since participants can use the OIS to hedge their exposure to short-term interest rate movements.

OIS are handy for tracking Bank of Canada rate expectations. The 90-day OIS, for example, essentially reflects the market’s view of the average Bank of Canada overnight rate over that timeframe.

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