One of you asked me through the shout-box to explain about this. Here I go.
Before we go on to learning a bit about this concept, let us first take a look at what a swap is in the first place. Traditionally, it is the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. Recently, swaps have grown to include currency swaps and interest rate swaps. If firms in separate countries have comparative advantages on interest rates, then a swap could benefit both firms. For example, one firm may have a lower fixed interest rate, while another has access to a lower floating interest rate. These firms could swap to take advantage of the lower rates. That is they exchange their interest rates with one another.
There are a number of swap contracts that can be entered into by two parties. Basis Rate Swap, Bond Swap, Commodity Swap, Credit Default Swap, Currency Swap, Interest Rate Swap, Non Deliverable Swap - NDS, Swap Spread, Total Return Swap, Variance Swap, Volatility Swap etc. You can get to know about each of them from the Financial Dictionary.
So in a swap, you exchange (swap) what you have with another one that is possessed by the counterparty to the contract. Now, let’s look at Overnight Index Swap. It is an interest rate swap involving a fixed rate being exchanged for a published index of an overnight reference rate. Usually there will be an independent third party which calculates the index of the reference rate. The OIS provides a flexible hedging tool for banks and corporate treasurers.