It's usually more effective to treat the OIS as a basis spread over LIBOR, rather than strip it's own curve:Fwd OIS payment = Fwd Libor payment - basis spread * (day count fraction)The reason is that if one has a swap (fixed against OIS), then if the swap is in the money or out of the money, the difference should be discounted at LIBOR, not OIS. (If one tries to cash settle to unwind the swap, the difference is called the "give back"). The reason for this discounting is that in a swap, the credit risk is the counterparty's credit risk, not the Feds.

hi......i have a question(which might be too elementary for u)....i am trying to build a par-par asset swap structure for a discount bond using 5yr fixed(semi-annual) versus OIS(componded daily)...is there any short-cut method to estimate the overnight forward rates so that I can compute the margin or have i got the problem all wrong?grateful if u could help.....

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QuoteOriginally posted by: PatIt's usually more effective to treat the OIS as a basis spread over LIBOR, rather than strip it's own curve:Fwd OIS payment = Fwd Libor payment - basis spread * (day count fraction)The reason is that if one has a swap (fixed against OIS), then if the swap is in the money or out of the money, the difference should be discounted at LIBOR, not OIS. (If one tries to cash settle to unwind the swap, the difference is called the "give back"). The reason for this discounting is that in a swap, the credit risk is the counterparty's credit risk, not the Feds.I know this is a drag since the thread is quite old - anyway - I like the formulation by Pat given by the above equation BUT have a hard time to understand why the basis spread levels out for 6months OIS, 9's and 12months - on the Internet I found, what I believe to be credible quotes for USD Overnight Index Swaps and (maturity) corresponding USD deposits. The 'basis spread' rises from 1month to 6month and then levels out between 6-12months. By the arguments used in this thread 1) compounding naturally takes it's bite (though minor 1/3bps for 1mth) 2) Credit risk (which is also likely to rise over the maturity) and then we are left with seasonalities (or ??) for the rest - would anyone clarify what's behind this logic (the logic behind the spread levelling out) ?OO

QuoteOriginally posted by: outcryQuoteOriginally posted by: PatIt's usually more effective to treat the OIS as a basis spread over LIBOR, rather than strip it's own curve:Fwd OIS payment = Fwd Libor payment - basis spread * (day count fraction)The reason is that if one has a swap (fixed against OIS), then if the swap is in the money or out of the money, the difference should be discounted at LIBOR, not OIS. (If one tries to cash settle to unwind the swap, the difference is called the "give back"). The reason for this discounting is that in a swap, the credit risk is the counterparty's credit risk, not the Feds.I know this is a drag since the thread is quite old - anyway - I like the formulation by Pat given by the above equation BUT have a hard time to understand why the basis spread levels out for 6months OIS, 9's and 12months - on the Internet I found, what I believe to be credible quotes for USD Overnight Index Swaps and (maturity) corresponding USD deposits. The 'basis spread' rises from 1month to 6month and then levels out between 6-12months. By the arguments used in this thread 1) compounding naturally takes it's bite (though minor 1/3bps for 1mth) 2) Credit risk (which is also likely to rise over the maturity) and then we are left with seasonalities (or ??) for the rest - would anyone clarify what's behind this logic (the logic behind the spread levelling out) ?OO

Hello everyone, I am a trader from Poland who wants to implement OIS product for domestic market. I would like to ask u about any tips or materials which could help me in starting this market or to survive during first months of trading this new (here in Poland) instrument. I would really appreciate any help. I have the theory and the pricing formula but no practice in trading OIS. First deals are going to be made in January so its about time for me to get prepared. Best regards

Hi everyone,I revive this thread to ask if I'm pricing this thing correctly... This is part of a structured product and I'm not familiar with this shea, so I'm not sure it's the standard eonia OIS swap.Here's the beef:I pay EONIA OIS - 57 bps, on the 15th of each month.with EONIA OIS = [product(1 + ni * ti/36000)-1]*36000/n i=1 to pp is the number of trading days in each periodfor each day i, ti = EONIA on this day. If i is a non trading day, then ti = EONIA the day before.\sum ni = n = exact number of days in the periodI took the EONIA swap rates on bloomberg (EUSWE1T... EUSWE2) and built a zero coupon curve out of them. As in my product def EONIA is capitalised, I think I only need a strip of 1M forwards to compute the cashflows I'll pay on each payment date. Then I substract the 57 bps, and discount the cashflows on the LIBOR swap zero curve.It seems to work, but sometimes I can have a 10 bps difference with my counterparty. I want to know if there's something obviously wrong with my methodology.Thanks to anyone who is able to shed light on this.