Overnight index swaps

One interesting variant of an interest rate swap is an overnight index swap (01s). This instrument commits one party to paying a fixed rate as usual. The floating rate, however, is the cumulative value of a single unit of currency invested at an overnight rate during the settlement period. The overnight rate changes daily. This instrument is used widely in Europe but not in the United States.

Build a Strong Respect for Risk

You must respect risk if you are to survive as an investor or a trader. Be- fore you ever place an order with your broker, make sure you calculate the maximum potential risk and reward as well as the breakeven(s) of the trade. This will help you stay in the game so you can achieve your goals. Risk graphs, which are explored in later articles, are important tools for assessing risk and reward.