What can be a potential strategy employing OIS swaps?

Utilizing Overnight Indexed Swaps (OIS) for executing arbitrage strategies is an effective application of these financial instruments. OIS swaps involve exchanging fixed interest rate payments for floating rate payments that are tied to an overnight index, typically reflecting central bank policies. This allows investors to exploit pricing discrepancies between different interest rate instruments or market conditions.

Arbitrage strategies using OIS swaps can involve taking advantage of differences in interest rates between various currencies or among different maturities within the same currency. For instance, an investor might find a situation where the fixed rates in OIS swaps do not align properly with the prevailing market rates for other interest rate derivatives, presenting a potential profit opportunity. The nature of OIS swaps also means that they are less sensitive to credit risk compared to other swaps, making them a safer choice for engagement in arbitrage.

In contrast, the other suggested applications are less relevant to the unique characteristics of OIS swaps. Hedging currency risks typically involves foreign exchange derivatives rather than interest rate swaps. Speculative trading is notably risky and, while OIS can be utilized in such ways, treating them as purely speculative instruments without risk overlooks the risks associated with interest rate movements. Limiting investments solely to fixed income securities does not leverage the flexibility that