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Developments in New Zealand’s overnight indexed swaps market

Raiko Shareef

New Zealand-dollar denominated Overnight Indexed Swaps (OIS) have been traded for just over a decade. Characteristics unique to OIS make them an ideal financial market instrument with which to hedge against a change in the Reserve Bank’s Official Cash Rate. Market participants tend to use OIS to hedge against short-term interest rate risk, or to speculate on the direction of monetary policy. As a result, the Reserve Bank uses OIS prices to gauge market expectations of future monetary policy decisions. Our analysis suggests that market-implied expectations are an unbiased predictor of the Official Cash Rate for all forecast horizons out to six months.