Interest Rates Derivatives

A forward rate agreements (FRA) is an over-the-counter contract between parties that determines the rate of interest to be paid on an agreed-upon date in the future. In other words, an FRA is an agreement to exchange an interest rate commitment on a notional amount.

An overnight indexed swap (OIS) is an interest rate swap (IRS) over some given term, e.g. 10Y, where the periodic fixed payments are tied to a given fixed rate while the periodic floating payments are tied to a floating rate calculated from a daily compounded overnight rate over the floating coupon period. Note that the OIS term is not overnight; it is the underlying reference rate that is an overnight rate. The exact compounding formula depends on the type of such overnight rate.

An IRS is a popular and highly liquid financial derivatives instrument in which two parties agree to, based on a specified notional amount, exchange cash flows derived from the differential between a fixed rate and a floating rate, or two different floating rates.