LIBOR-OIS swaps

Guys, I'm just starting a pricing class and am a little confused by a statement in a class reading (a fed report). It goes something like this:

"A bank borrowing at the 3-month LIBOR rate of 2.10
percent that enters into a swap to receive at the 3-month OIS
rate of 2 percent has a borrowing cost equal to the effective
federal funds rate plus 10 basis points."

I'm not sure how does the fed funds rate come into the picture here. Is it assumed that the bank initially borrows the principal at fed funds rate and now has to pay a net 10 bps interest in this swap deal which adds up to a total effective borrowing cost of fed funds rate + 10 bps?

Could someone please clarify? Any input would be appreciated.

Thanks in advance.

 

Got it. So when people are referring to the so called OIS rate, they are talking about that number which is either the fixed leg rate or the FF rate since they would have the same value when people initially enter into a OIS deal. (which also implies that swap itself would have zero value at T0). Would that be an appropriate way to understand this? Thanks!

 

Dolorem velit debitis porro aut voluptatem nihil odit. Illum qui dolor voluptas deserunt ut perferendis. Est fugit non voluptatem officiis blanditiis ab deleniti. Placeat rem blanditiis at voluptas ut neque.

Ullam sit rerum aut non cum quia unde autem. Voluptas deserunt ut voluptatibus ut.

Career Advancement Opportunities

March 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. (++) 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

March 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

March 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

March 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (86) $261
  • 3rd+ Year Analyst (13) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (202) $159
  • Intern/Summer Analyst (144) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
BankonBanking's picture
BankonBanking
99.0
5
dosk17's picture
dosk17
98.9
6
DrApeman's picture
DrApeman
98.9
7
kanon's picture
kanon
98.9
8
CompBanker's picture
CompBanker
98.9
9
GameTheory's picture
GameTheory
98.9
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”