Overnight Index Swap

 

The overnight index swap is a special form of the compound swap.

Example Example

  • EONIA Swap (EUR)

  • Federal Fund Rate Swap (USD)

End of the example.

In an Overnight Index Swap, a fixed interest rate is swapped for a variable one. This is based on the call money fixing of the overnight index (for example, EONIA (= EURO OverNight Index Average), Federal Fund Rate).

The overnight index swap has the following properties:

  • On the variable side, interest rate adjustment takes place daily, where the weekend is calculated on the same base amount and at the same interest rate as the friday payment. The interest calculated linearly is capitalized and the variable interest is not paid daily but periodically, for eyample, every 6 months (for a Federal Fund Rate swap) or every 12 months (for an EONIA swap).

    However, a swap can be terminated prematurely.

    Calculation of interest to be paid periodically is based on an average interest rate rounded to the number of decimal places set. This results at runtime in a difference to the exact calculation method.

    where:

    rf

    Overnight index interest rate to be calculated

    t0

    Start date of the overnight index swap

    tn

    End date of the overnight index swap

    ri

    Cash call fixing at time i

    di

    Days validity for ri, normally = 1, on weekends = 3)

    n

    Total number of days

    The interest calculation method underlying the interest rates is the Euromethod (actual/360).

  • The rhythm of payments of the fixed side is the same as that of the variable side, that is, payment is periodic.

  • Only the difference amount flows between the fixed and variable sides on the periodic due dates.

Integration

For the overnight index swap, you can calculate the cash value on a particular due date by using the Market Risk Analyzer. For more information, see the price calculator information for the Overnight Index Swap.

Activities

You create the overnight index swap in the same way as you create a compound swap. Additionally, you must make the following settings for the term details:

  • Interest Term Details

    • Term Type: Interest Capitalization

      (that is, a term type with term category Interest Capitalization)

    • Interest Method: act/360

    • Type of Interest Calculation: Linear Tax Calculation

    • Update

      • Rule: Adjusted

      • Frequency: 1 Calendar Day

      • Days +/-: 1-

    • Due Date

      • Maturity: 2nd day of runtime

      • Working Day: Following working day

  • Interest Payment Terms Details

    • Term Type: Payment of Capitalized Interest Term Type with term category Payment of Capitalized Interest

    • Update

      • Rule: Regular

      • Frequency: For example, 12 (EONIA swap) or 6 (Federal Fund Rate swap) Months

      • Days +/-: 1-

    • Due Date

      • Maturity: 1st day of runtime

      • Working Day: No Shift

    • Valuation

      • Calculation Type: With Average Interest Rate

      • Rounding Unit: 0.0001000 (4 decimal places, relevant for the EONIA swap) or 0.0000100 (5 decimal places, relevant for the Federal Fund Rate swap)

      • Rounding: Commercial Rounding

  • Interest Rate Adjustment Term

    Standard Setting