1. Repricing Swaps & OIS Discounting
USING FED FUNDS RATE TO DISCOUNT P&L TO CALCULATE V.MARGIN

2. BY CHANGING THE FIXED RATE
Pricing Swaps - Review
Recall an at-market swap rate is the rate where the fixed and floating cash flows equal a net present value of zero
7/1/17
USE GOAL SEEK
TO SET THE SUM OF THE
NET PVS TO ZERO
BY CHANGING THE FIXED RATE
7/1/19
7/1/18
DATES FOR FWD
SPOT
FWD RATES, DATES
FLOATING FV, DF, PV
FV * DF = FV
NPV -0-

3. Review – Pricing Interest Rate Swaps
Repricing US Dollar Interest Rate Swaps – Two Curves
LIBOR is used to calculate P&L
OIS Discounting to calculate collateral
FRA
one period swap
ED future
Interest Rate Swap
Portfolio of FRA’s

4. Repricing Swaps Using LIBOR - review
EFFECTIVE DATE 7/1/17
7/1/17
7/1/18
7/1/19
NEW FORWARD RATES
NEW LIBOR RATES
1 YR 7.25%
2 YR 8.00%
3 YR 8.50%
RECEIVE
PAY
6.25%
8.755%
9.507%
NEW FORWARD RATES
12 x %
24 x %
7.445%
7.445%
7.445%
MTM 7.445% PAYER FRA’s
LIBOR
-1.195%
1.31%
2.06%
($11,142)
CALCULATE
PRESENT VALUES
11,232.84
NPV = $16,233.44
$16,142.78

5. Reprice Swaps Using OIS Swaps
What is OIS?
OIS stands for Overnight Index Swap
OIS Swap = LIBOR is swapped for Effective Fed Funds Rate
What is the Effective Fed Funds Rate?
Fed Funds are unsecured loans of excess reserves held by the Fed on behalf of member banks
The member bank with excess reserves can lend to other commercial banks with insufficient reserves
The weighted average of transactions in a given day is called the Fed Funds Effective Rate (EFF)

6. Reprice Swaps Using OIS Swaps
PAY
Fed Funds
REC
3 Mo. LIBOR
PAY EFF FED FUNDS
RECEIVE LIBOR
The 3 month LIBOR leg is reset as normal, every three months s new 3 month reset rate is given to the counterparty.
Effective Fed Funds rate is an average of the daily rates during the reset period (one month or three months)
In this way, it’s a daily rate but paid periodically.

7. Reprice Swaps Using OIS Swaps
EXAMPLE OF AN OIS SWAP:
The Effective Fed Funds rate 2.35%
LIBOR rate for same term 3.00%
The OIS Swap is trading at 65 bps
2.35% would be used as the Effective Fed Funds rate to discount The new forward rates to present value

8. Review – Pricing Interest Rate Swaps
Cleared and un-cleared derivatives use the same repricing process
The LIBOR curve is used to calculate the market-to- market
The OIS curve is used to calculate collateral calls.

9. Reprice Swaps Using OIS Swaps
Why don’t we just use the Effective Fed Funds Rate?
Because Fed Funds are a short term lending market.
Fed Fund loans can only be made with a bank’s excess reserves.
These two reasons make them inefficient to use for repricing
Also, OIS Swaps are so very liquid out past 10 years.

10. Reprice Swaps Using OIS Swaps
Hedge Funds use interest rate swaps as a synthetic financed bond position.
But the 3 month LIBOR leg, operating as their financing leg – similar to repo – was too long term for the hedge funds to manage risk
They wanted swaps where bonds were financed with overnight rates instead of 3 month LIBOR
Thus was born the OIS Swap: and their financing was converted to fed funds

11. Reprice Swaps Using OIS Swaps

12. Reprice Swaps Using OIS Swaps

13. Reprice Swaps Using OIS Swaps

14. Reprice swaps w/ LIBOR rates - Review
7/1/17
EFFECTIVE DATE 7/1/17
$1,000,000.
7/1/18
7/1/19
6.25%
8.755%
9.507%
NEW FWD RATES
LIBOR
DISCOUNT RATES
NEW LIBOR FWD RATES
1 YR 7.25%
2 YR 8.00%
3 YR 8.50%
7.445%
-1.195%
1.31%
2.062%
($11,142)
11,232.84
$16,142.78
PV = $16,233.44
FRA
COUPON
MTM
(11,950)
$13,102
$20,619
8.50%
8.00%
7.25%
CALCULATE
PRESENT VALUES

15. Reprice Swaps Using OIS Swaps
LIBOR
E.F.F.
OIS
NEW LIBOR FWD RATES
1 YR 7.25%
2 YR 8.00%
3 YR 8.50%
EFF. FED FUNDS
1 YR 6.60%
2 YR 7.35%
3 YR 7.85%
OIS SWAP
1 YR .65%
2 YR .65%
3 YR .65%

16. Reprice Swaps Using OIS Swaps
THIS IS THE INTER-DEALER BROKER’S SCREEN FOR OIS SWAPS

17. Reprice Swaps using OIS Swaps

18. REPRICE SWAP versus LIBOR Discounting

19. REPRICE SWAP w/ OIS Discounting

20. REPRICE SWAP W/ OIS Discounting

21. LIBOR versus OIS Discounting

22. LIBOR versus OIS Discounting

23. LIBOR versus OIS Discounting

24. Repricing Interest Rate Swaps
Both cleared and uncleared Interest Rate Swaps use OIS swaps to reprice all swap positions for collateral
The dollar amount may differ, but the metrics will be:
The actual collateral posted and metrics such as
The bond’s liquidity,
The bond’s price,
The bond’s credit rating,
The haircut charged by the CCP versus the OTC counterparty
The currency in which collateral is denominated

25. Thank You I hope this slide show explained OIS Discounting clearly
And will serve your purposes.
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