Practical Applications from the Experts - April 2009

categories: Product Documentation, general

Overnight Indexed Swaps

RiskMetrics Group recently introduced to the Overnight Index Swap model 2 new fields: Day Count Basis and Coupon Frequency.  This allowed for simple compounding of interest (daily compounding) and multiple payment periods. We also recently introduced the following curves for OIS: 

Fed Funds Overnight Index Swap (RM Name "USD Fed Funds OIS")

Sterling Overnight Index Swap (SONIA) (RM Name "GBP SONIA OIS")

Euro Overnight Index Swap (EONIA) (RM Name "EUR EONIA OIS") 

Analytically the engine discounts future cashflows using a yield curve based on the OIS market. When the user specifies the Overnight Index, the user is actually pointing to the one day node of a yield curve that is used to discount all cashflows. This interest rate curve is a blend where the one day point is the overnight rate (the index) and where other nodes are derived from the OIS market. 

Below is an example of paying fixed/receiving float on USD Fed Funds while paying float/receiving fixed on EUR EONIA.  One can obtain typical Fixed Income statistics such as DV01 and generalized interest rate shifts.

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