FRA-OIS demise leaves hole in bank treasury risk management
Banks now face ‘greater downside’ to widening credit spreads
For years, a basis swap market known as FRA-OIS has served as a useful, reliable and liquid way for US bank treasury teams to manage their funding risk.
The package, a combination of a US dollar forward rate agreement (FRA) and an overnight index swap (OIS), captured the spread over the risk-free rate attributable to bank credit risk, which ultimately affects the cost of funding for dealers.
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