Fixed Income Markets and Their Derivatives, 3rd Edition

Chapter 14

Derivatives on overnight interest rates

Chapter Summary

This chapter describes two important derivatives in the overnight money market segment of fixed income markets. They are the Fed funds futures contracts and the overnight index swaps (OIS). These derivatives are used extensively by the market to try to anticipate the actions of the Fed and for risk management purposes. In this chapter we describe these contracts and develop simple valuation framework for OIS contracts.

14.1 Overview

Overnight lending and borrowing are important parts of financial markets. We saw in Chapter 5 how participants in fixed income markets use repo markets for funding purposes on an overnight basis. In addition, the central bank uses repo transactions to implement ...