Which of the following is an advantage of an OIS swap?

Choosing the ability to manage liquidity and interest rate risk separately highlights a key advantage of an Overnight Index Swap (OIS). An OIS is a derivative contract where one party pays a fixed rate while receiving a floating rate indexed to an overnight rate, such as the effective federal funds rate. This structure allows institutions to hedge against fluctuations in interest rates while simultaneously managing their liquidity needs.

For example, if a financial institution has excess liquidity but is concerned about rising interest rates, it can enter into an OIS where it pays a fixed rate and receives a floating rate. This strategy helps in mitigating the risk posed by changes in interest rates while keeping the management of liquidity distinct from interest rate exposure.

This functionality of OIS is particularly beneficial for portfolio managers and treasury operations, as it allows them to balance their interest rate strategies without directly tying their liquidity management to the rates they are paying or receiving. This separation improves overall risk management capabilities in a portfolio context.