how does an overnight index swap ois work 
in an overnight index swap the overnight rate is exchanged for a fixed interest rate an overnight index swap uses an overnight rate index such as the federal funds rate as the underlying rate for the floating leg while the fixed leg would be set at a rate agreed upon by both parties the interest of the overnight rate portion of the swap is compounded and paid at reset dates with the fixed leg being accounted for in the swap s value to each party the floating leg s present value pv is determined by either compounding the overnight rate or by taking the geometric average of the rate over a given period overnight index swaps are popular among financial institutions because the overnight index is considered to be a good indicator of the interbank credit markets and less risky than traditional interest rate spreads 1