FRM Part I · FRM Exam Part I · Swaps
The spread between 3-month LIBOR and the 3-month OIS rate widens sharply during a period of market stress. What is the most appropriate interpretation?
A widening LIBOR-OIS spread signals higher perceived credit and liquidity risk in unsecured interbank lending. OIS is nearly risk-free, while LIBOR contains a bank risk premium, so the gap between them measures stress in funding markets rather than a change in policy rates.
- ABanks perceive higher credit and liquidity risk in unsecured interbank lendingCorrect
- BThe central bank has reduced its overnight policy rate
- CCollateralized lending has become riskier than unsecured lending
- DDemand for overnight funding has fallen relative to term funding
Explanation
OIS is close to a risk-free rate, whereas LIBOR reflects unsecured bank lending. A wider spread means a larger premium for bank credit and liquidity risk. A policy rate cut would move both rates and would not by itself widen the spread.
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