Overnight indexed swap

An overnight indexed swap (OIS) is like a game where you and your friend make a bet about whether a bedtime story will be finished by the time you wake up in the morning.

The rules of the bet for an OIS are:

1. You and your friend agree on a reference rate, which is a number that tells you how much money your friend would have to pay you if the bedtime story is not finished by the morning.

2. You also agree on a swap rate, which is like an insurance policy that you buy from your friend. You agree to pay your friend a fixed amount of money in exchange for their promise to pay you the reference rate if the bedtime story is not finished by the morning.

3. The amount of money that you and your friend will exchange is based on the difference between the reference rate and the swap rate.

4. If the bedtime story is finished by the morning, you win the bet and you don't have to pay your friend anything. But if the bedtime story is not finished by the morning, your friend wins the bet and they will pay you the reference rate.

So in simpler terms, an OIS is a bet between two parties on whether a specific overnight interest rate will be higher or lower than a fixed rate agreed upon by both parties. If the overnight rate is higher, one party pays the other party the difference, and if the overnight rate is lower, the other party pays the difference.