AIMs: Describe Overnight Indexed Swaps (OIS) and explain the characteristics of the OIS rate which could make it preferable to use as a “risk-free” rate. Describe the relationship between the OIS rate, the federal funds rate, and LIBOR.
Questions:
407.1. Each of the following is true about an overnight indexed swap (OIS) except which is not necessarily true?
a. An OIS is an interest rate swap
b. An OIS payment references a notional amount such that principal is not exchanged
c. An OIS contains no sources of credit risk
d. An OIS exchanges a fixed interest rate for a floating rate that is the geometric mean of a daily overnight rate
407.2. In relation to the risk-free rate, Hull supports each of the following arguments as true EXCEPT which argument does he not make?
a. There is no perfect risk free rate
b. The evaluation of an investment should depend on the way it funded not on the risk of the investment
c. Risk-neutral valuation shows that risk-neutral expected cash flows should be calculated using the risk-free rate and discounted at the risk-free rate.
d. The discount rate used to determine the no-default value of a derivative or derivatives portfolio should always be the risk-free rate
407.3. Which of the following best summarizes the relationship between the OIS rate, the federal funds rate, and LIBOR?
a. OIS is a swap which references an overnight (one day) LIBOR rate
b. OIS is a swap which references an unsecured, overnight (one day) rate which is often the effective (average) federal funds rate
c. The three-month OIS-Federal spread is a popular barometer of fear of bank insolvency
d. OIS has no relationship to either the federal funds rate or LIBOR
Answers:
Questions:
407.1. Each of the following is true about an overnight indexed swap (OIS) except which is not necessarily true?
a. An OIS is an interest rate swap
b. An OIS payment references a notional amount such that principal is not exchanged
c. An OIS contains no sources of credit risk
d. An OIS exchanges a fixed interest rate for a floating rate that is the geometric mean of a daily overnight rate
407.2. In relation to the risk-free rate, Hull supports each of the following arguments as true EXCEPT which argument does he not make?
a. There is no perfect risk free rate
b. The evaluation of an investment should depend on the way it funded not on the risk of the investment
c. Risk-neutral valuation shows that risk-neutral expected cash flows should be calculated using the risk-free rate and discounted at the risk-free rate.
d. The discount rate used to determine the no-default value of a derivative or derivatives portfolio should always be the risk-free rate
407.3. Which of the following best summarizes the relationship between the OIS rate, the federal funds rate, and LIBOR?
a. OIS is a swap which references an overnight (one day) LIBOR rate
b. OIS is a swap which references an unsecured, overnight (one day) rate which is often the effective (average) federal funds rate
c. The three-month OIS-Federal spread is a popular barometer of fear of bank insolvency
d. OIS has no relationship to either the federal funds rate or LIBOR
Answers:
