The launch of HUFONIA and the related international experience of overnight indexed swap (OIS) markets
AbstractIn relation to the October 2010 launch of the HUFONIA Swap Index, we discuss the most important characteristics of the overnight indexed swap (OIS) market, one of the fastest-growing segments of advanced money markets. OIS contracts allow for the cost-effective management of short-term interest rate risks while also facilitating profitable investment strategies to foresee the central bank's interest rate decisions, which, according to international experience, have greatly contributed to their popularity. A further benefit of OIS contracts is that partners’ credit risk and counterparty limits only play a minor role in their pricing. Looking at the underlying motives of central banks in market development, empirical analyses show that OIS markets can provide one of the most accurate indicators of short-term interest rate expectations, and could furnish additional information in the preparation and evaluation of monetary policy decisions. In conjunction, the financial crisis brought attention to the significance of the so-called LIBOR-OIS spread, an indicator also suitable for assessing the solvency of the banking system. The essential conditions of market development, such as the availability of a reliable reference rate and the presence of foreign market makers, are ensured in Hungary. However, due to the limited market size the fixed costs of market development are somewhat higher than in major currency areas. Nearly half of market makers have prepared their trading and accounting systems for transactions until 2011 Q2. Market activity could be driven by strategies aimed at mitigating or converting banks’ exposure to interest rate risks in the future.
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Bibliographic InfoArticle provided by Magyar Nemzeti Bank (the central bank of Hungary) in its journal MNB Bulletin.
Volume (Year): 6 (2011)
Issue (Month): 1 (April)
OIS; overnight indexed swap; HUFONIA; libor-ois spread; interest rate risk; policy rate expectations; market building.;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
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- Szilárd Erhart & Imre Ligeti & Zoltán Molnár, 2013. "Reasons for the LIBOR review and its effects on international interbank reference rate quotations," MNB Bulletin, Magyar Nemzeti Bank (the central bank of Hungary), vol. 8(1), pages 23-34, January.
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