Identifier: C3T7L4 · Revision: 2026-10-26 · Classification: restricted

Decision and objectives

Compound overnight reference observations over stated calendar days. The decision record must connect the exposure, cash dates and implementable contract, rather than stop at a favorable price forecast.

By the end, you can compound overnight reference observations over stated calendar days; calculate a supplied start-settled forward rate agreement; compare an overnight index with a term loan benchmark.

Prerequisite: C3T7L3; completed Classes 1 and 2 and the Stock Market School foundation or Forex School foundation. All cases below are hypothetical; their prices, costs, rates, dates, contractual assumptions and collateral amounts are teaching inputs, not current offers.

Mechanics

An overnight index swap (OIS) exchanges a fixed payment against an overnight-index-based accrued return over a period. TLREF is a Turkish lira overnight reference with published methodology, contingency and correction rules. A coupon confirmation must state observation dates, nonbusiness-day weighting, lookback or shift, payment lag and fallback. It is not enough to call a loan TLREF-linked without those details.

A forward rate agreement (FRA) fixes an interest comparison for one future accrual period. Under a common supplied start-settlement convention, the interest difference is discounted to the period start. Other conventions must be read rather than assumed.

Price and return drivers

Overnight compounded factor = product(1 + daily annual rate × calendar days/basis) − 1. Use calendar weighting for weekends. Start-settled borrower FRA receipt = notional × (realized rate − agreed rate) × accrual fraction / (1 + realized rate × accrual fraction), under the explicit simple convention below.

The current TLREF methodology, effective 29 January 2026 and checked 26 October 2026, states actual/365 in section 3.2(e) and uses 365 in its index calculation. The following actual/360 mini-examples are fictional conventions chosen only to isolate compounding and FRA settlement arithmetic; they do not reproduce the actual TLREF benchmark basis or define a current TLREF-linked customer contract.

Worked case

Hypothetical TRY 1,000,000 OIS mini-period: rate 36% for one calendar day, then 40% for three days, actual/360. Floating factor = (1 + 0.36/360) × (1 + 0.40 × 3/360) − 1 = 0.0043366667. Floating cash TRY 4,336.67. Fixed 38% for four days gives TRY 4,222.22; fixed payer net receives TRY 114.44 before fees. Separately, hypothetical borrower FRA notional TRY 1,000,000, K 30%, realized R 34%, 90/360: receipt = 1,000,000 × 0.04 × 0.25/1.085 = TRY 9,216.59 at period start. Do not count the undiscounted TRY 10,000 again at period end.

Adverse case

If the three-day overnight rate is 50%, the floating cash becomes TRY 5,170.83 and net receipt TRY 948.61. A simple average that ignores the three-day weight understates the coupon. A loan using a different observation shift can still cost more than the OIS receipt. In the FRA, realized rates 20%, 30% and 34% yield approximately −TRY 23,809.52, zero and +TRY 9,216.59 to the borrower hedge at start, distinct from pre-start replacement values.

Practical use

Read current TLREF methodology and the negotiated confirmation; a public reference definition does not establish swap access or a quoted rate. Record day counts, fixing fallback, payment lag, credit and collateral conditions. Add setup and service charges, collateral financing, settlement/termination spread and tax. Fees are excluded from the miniature coupon arithmetic to isolate conventions; full-cost comparison is in C3T7L5.

Reconcile the confirmation, position register and cash statement separately. Costs include the quoted bid/ask spread, brokerage and clearing charges, collateral or principal financing, currency conversion, custody where relevant, and exit or termination charges. A mark is not a fill. Any amount explicitly excluded below remains outside the reported result. Tax is excluded from these teaching cases: an actual comparison requires income year, investor residence and individual/corporate status, contract and acquisition dates, settlement form and effective law. The GIB guide, checked 2026-10-26, covers 2025 individual investment income, so its publication date alone does not settle a 2026 derivative liability.

Decision boundaries

Use an OIS only when its accrued reference matches the exposure sufficiently, and an FRA for the specified future period rather than an entire rolling loan. Decline a comparison that hides weekend weights or settlement timing. A fixed initial quote does not remove benchmark, collateral or provider risk.

Practice and references

Exercise: hypothetical overnight rate 36% over two one-day observations, actual/360, notional TRY 500,000. Compare compounded floating and 36% simple fixed cash over the two days. Solution: factor (1.001)^2 − 1 = 0.002001; floating cash TRY 1,000.50. A 36% fixed two-day simple leg pays TRY 1,000, so fixed payer receives TRY 0.50 before costs. Equal annual labels need not give identical accruals.

Takeaway: Compare an overnight index with a term loan benchmark using the actual cash schedule, with every excluded cost and remaining exposure stated.

Reference card: overnight-index-swap. Formula: Start-settled borrower FRA difference. Glossary: Overnight index swap, Forward rate agreement, Observation shift. Next lesson: C3T7L5. Topic test.

Sources and verification date (2026-10-26):

Related product cards: viop-rate-future, forward-rate-agreement.

Additional formulas: overnight-compounding.

Shared reference guide