What's the difference between the OIS curve and the swap curve?

Q: What's the difference between the OIS curve and the swap curve?

Before 2008, practitioners used a single LIBOR-based swap curve for both forecasting floating payments and discounting cash flows. The crisis revealed LIBOR contains significant credit/liquidity spreads — so banks started discounting collateralized derivatives using Overnight Indexed Swap (OIS) rates, which reflect nearly risk-free overnight lending.\n\nKey distinctions:\n\n1. OIS curve: derived from overnight rates (Fed Funds, SOFR, €STR). Represents the funding cost of fully collateralized positions. Used for discounting all cleared/collateralized trades.\n\n2. Swap curve (IBOR or SOFR-based): derived from 3M or 6M index swaps. Used for forecasting floating-rate payments on the swap.\n\nThe spread between them — the LIBOR-OIS spread — jumped from ~10bps pre-crisis to over 300bps in 2008, proving they aren't equivalent. A 10Y vanilla swap today requires: (a) projecting floating cash flows off the SOFR forecasting curve, then (b) discounting all cash flows using OIS zero rates.\n\nFor uncollateralized trades, CVA/FVA adjustments add further complexity. The dual-curve framework is standard in bank risk systems now — single-curve pricing is obsolete for professional work.

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Before 2008, practitioners used a single LIBOR curve for both forecasting and discounting. The crisis revealed LIBOR contains credit and liquidity spreads...

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Key distinctions:

1. OIS curve: derived from overnight rates (Fed Funds, SOFR, €STR). Represents the funding cost of fully collateralized positions. Used for discounting all cleared/collateralized trades.

2. Swap curve (IBOR or SOFR-based): derived from 3M or 6M index swaps. Used for forecasting floating-rate payments on the swap.

The spread between them — the LIBOR-OIS spread — jumped from ~10bps pre-crisis to over 300bps in 2008, proving they aren't equivalent. A 10Y vanilla swap today requires: (a) projecting floating cash flows off the SOFR forecasting curve, then (b) discounting all cash flows using OIS zero rates.

For uncollateralized trades, CVA/FVA adjustments add further complexity. The dual-curve framework is standard in bank risk systems now — single-curve pricing is obsolete for professional work.

What's the difference between the OIS curve and the swap curve?

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