libor ois trading

Download Libor OIS trading

Post on 18-Nov-2014



Economy & Finance

4 download

Embed Size (px)


Since their introduction in the 1990s short term derivatives instruments have become widely used. Their popularity has increased in the wake of the 2007/2008 financial crisis with trading growing by 33% from 2008 to mid 2009 according to the BIS. It is due mainly to the fact that LIBOR-based instruments often did not capture movements in policy rates as a result of credit-induced widening in LIBOR rates. Hedgers increased their usage of short-term instruments in order to protect their cash flows better from unexpected moves in spreads and/or policy rates. Meanwhile, speculators increased their trading of more tailored products such as OIS to express views on policy rates while becoming far more active in the basis markets to take advantage of spread movements. This tutorial focuses on the Libor OIS basis trade. It starts with the building blocks of the LIBOR and moves on to cover the most common instruments in the front-end and basis markets : FRAs and OIS. The salient features of each instrument and the full trade cycle from idea generation and set up, to valuation and marked to market, are presented and illustrated using Bloomberg pricing and analytics.


  • 1. Overnight Index Swaps A guide to OIS tradingJosie von Etzdorf and Francois Choquet Advanced Specialists Asia Pac Analytics 2011
  • 2. Growth of Short Term IR Trading Single Currency Interest Rate Swaps and Forwards < 1 y Maturity (in mln) Asia Pac Analytics 2011
  • 3. Libor Libor stands for London Interbank Offered Rate, a daily fixing set at 11.00 a.m. London time by the British Bankers Association as a set of reference rates for USD, EUR, GBP, JPY, CAD, AUD, NZD, CHF, DKK, SEK. Contributor banks post a rate at which they could borrow unsecured money in reasonable market size in the interbank market. The rates are averaged after removing the top and bottom quartile. {BBAM1} displays the fixings which are
  • 4. BBA USD Libor Fixings
  • 5. US0003M The USD 3 month LIBOR fixing is the most used short term reference rate around the world. EDA, the globally most active interest rate future uses 3 month LIBOR as the underlying notional. Floating rate bonds use Libor + (or -) a spread as their coupon. {EF1653262DES} Interest Rate Swaps use 3 month LIBOR as the floating reference rate. {USSW5DES} Corporate loans are typically set with LIBOR plus a spread. {LN302060YA}
  • 6. Forward Rate Agreements - FRAs A derivative which uses a combination of interbank rates and futures to price notional interbank borrowing or lending. {EDSF} These are actively traded {TPFR} {SL3L1HI6SWPM} The Libor rate 2 days prior to the effective date is the reference used to settle the contract using money market conventions.
  • 7. IMM Dates FRAs and short term Swaps often trade using IMM (International Monetary Market sector of the Chicago Mercantile Exchange) dates to match Futures expiry. Eurodollar futures expire on the third Wednesday of the contract month, thus the last trade is 2 days prior e.g. EDU1 ends on September 21st, thus September 19th. EDZ1 expires on December 21st, with a last trade on December 19th. {EDAEXS} The September contract is a notional interbank 3 month deposit with dates matching the futures, thus September 21st to December 21st .
  • 8. OIS- Overnight-Indexed Swaps An Overnight-Indexed Swap (OIS) is like a plain vanilla fixed/floating interest rate swap but the floating leg is a reference published overnight rate, which compounds daily. It is usually a short term swap and unlike an interbank deposit, the fact that this is a notional contract means that counterparty risk is minimised. For trades with a maturity up to One Year, at maturity the difference between interest accrued at the fixed rate and interest accrued at the compounded floating rate on the agreed notional amount of the swap is settled as a one time payment. In the case of longer term swaps, there will be a Monthly, Quarterly, Semi annual or Annual coupon payment dates subject to local market convention. {TPOS}
  • 9. FRA/OIS spread Direct measure of the credit quality of financial institutions. A long FRA/OIS spread represents a view on or hedge for deteriorating bank credit quality, thus gives exposure to the spread which increases with worsening bank credit quality. Strong correlation between CDS and FRA/OIS spread. Asia Pac Analytics 2011
  • 10. Asia Pac Analytics 2011
  • 11. HEDGING WITH FRA-OIS 3 Months 3 Months FRA FRA FRATrade valuation fixing settlement Maturity 2 bus days 2 bus OIS 2 bus OIS days OIS Maturity days Settle Starts Fixed Rate for Forward Fixed Rate FRA Starting OIS Swap Dealer Investor FRA Counterparty 3 month OIS 3 month Libor Expected Payoff at Maturity: 3mL 3m OIS Libor/OIS Spread Asia Pac Analytics 2011
  • 12. Asia Pac Analytics 2011
  • 13. FRA/OIS TRADEEUR 800mm FRA/OIS 9X12 on the 20th; Trade date: 3/18/2010 OIS 0.92% FRA 1.17 %Swap Dealer Investor FRA Counterparty 3 month OIS 3 month Euribor Expected Payoff : 3mL 3m OIS 25 bps At settlement 12/22/2010 = EURIBOR 3M / OIS 3M 45 bps Trade P&L at unwind 20 bps Asia Pac Analytics 2011
  • 14. Asia Pac Analytics 2011
  • 15. Asia Pac Analytics 2011


View more >