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FRM Part I · FRM Exam Part I · Swaps

The 3-month LIBOR rate is 5.10% and the 3-month OIS rate is 4.85%. What is the LIBOR-OIS spread, and how is a widening of this spread typically interpreted?

The spread is 25 basis points, found by subtracting 4.85% from 5.10%. Because LIBOR embeds bank credit and liquidity premia while OIS is nearly risk-free, a widening spread is read as higher perceived credit and liquidity risk in interbank lending, not as a change in policy rate expectations.

  1. A25 bp; greater perceived credit and liquidity risk in interbank lendingCorrect
  2. B25 bp; lower perceived credit and liquidity risk in interbank lending
  3. C2.5 bp; greater perceived credit and liquidity risk in interbank lending
  4. D25 bp; a rise in the central bank's expected policy rate

Explanation

The spread is 5.10% - 4.85% = 0.25% = 25 bp. LIBOR is an unsecured term bank-borrowing rate while OIS reflects expected overnight rates with little credit risk, so a wider spread signals higher credit and liquidity concerns. A move in expected policy rates would affect both rates and not the spread, and a wider spread does not mean lower risk.

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