September and December eurodollar futures, contracts betting on the future rate of dollar deposits in European banks, were selling off on Monday, their rates rising. But dollar funding rates were steadier than euro funding rates, reflecting the belief that most market participants have enough dollars for now. Equivalent euribor rates also rose. Analysts said souring market sentiment was giving rates a further push higher by making banks less willing to lend to each other on an unsecured basis.
Bonds News Updated. By Emily Flitter 4 Min Read. The OIS is not the secured collateralised lending rate. It represents the cost of repeated overnight unsecured lending over periods of up to two weeks sometimes more. Because it is based on overnight lending, it is assumed to have a lower credit risk than longer term interbank loans based on say 1M, 2M or 3M Libor and this is what drivers the OIS-Libor spread.
An overnight index swap OIS is a swap in which one party pays a fixed rate of interest known as the OIS rate which depends on the term of the swap and is known at trade inception. It is linked to the cost of unsecured lending. The other party pays the rate equivalent to the daily compounded index rate over the life time of the OIS. This is not known until the end of the life of the OIS. To make the OIS swap have zero initial value at inception, which is how it is traded, the OIS rate therefore must equal the market's expectation of what the compounded daily geometric average index rate will be over the lifetime of the OIS.
In USD the index rate is the fed funds rate which is linked to the cost of unsecured lending. The main use of OIS swaps is to allow banks to lock in the cost of unsecured overnight funding in advance. Finally, your confusion may be due to the use of OIS for discounting of collateralised non-cleared derivatives.
This is market practice since The OIS rate is used because it is close to the typical interest rate paid on the collateral that is held. It becomes the best estimate of the risk-neutral risk-free rate in a world where the collateral has effectively eliminated counterparty risk. Secured and unsecured refers to lending. It is a different animal. For example my name is Noob Rademayer, I am not a bank so I can't lend or borrow FF in the interbank market, but I can bet on the rate at which banks do.
For example I could bet that the cost of borrowing 1,, in FF over the next 30 days will go up. To let me make these bets the counterparty may require me to put up a small amount of margin, however I still would not call that secured lending, it is just the normal margin for any derivative trade nowadays enough to cover the loss if something goes wrong, maybe USD, not the full notional.
On the other hand if I wanted to borrow 1 million USD from my broker I would have to put up more than 1 million in marketable securities; that is a secured loan. Sign up to join this community. The best answers are voted up and rise to the top.
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Investors were putting a premium on instruments used to store cash for short periods of time, including U. But bets on the rate of dollar deposits in European banks, as well as on the future spread between a three-month overnight dollar interbank lending rate and a benchmark fixed-for-floating interest rate swap, revealed expectations that the cost of borrowing dollars could rise by September.
Getting hold of dollars may get harder for European banks as loans taken out by banks and other companies with exposure to countries like Greece, Italy and Portugal come due. Such concerns have added to volatility in Italian banking shares and prompted regulators to seek disclosure of certain short positions. The spread typically hovers around 10 basis points. But the Libor-OIS spread still has a fair way to go before anything like panic appears; during the financial crisis, when the interbank lending markets froze, it hit basis points.
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