A swap exchanging a fixed rate for compounded overnight rates over a period, used to read the market's expected average policy rate.
Because the floating leg compounds an overnight rate such as sofr or effr, an OIS price is essentially the market's forecast of the average policy rate over that window, with minimal credit risk attached.
OIS is therefore the cleanest read on Fed expectations across any horizon, and the discounting curve for cleared derivatives. Traders quote rate-cut probabilities off OIS and fed-funds-futures interchangeably.
Example: the current policy rate is 5.33% and the 1-year OIS trades at 4.58%. The market expects an average of 4.58% over the next year, consistent with roughly 150 bp of cuts spread through the period.
Original diagrams for the ideas on this page. Illustrative, not real market data.
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.
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