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. For example:
- A 90-day OIS essentially reflects the market’s view of the average Bank of Canada overnight rate over 90 days.
- A one-year OIS tracks rate expectations one year out.