Hedge the risk of rising interest rates

Yes, you can. Indeed, this service would be of great benefit to you, if you wish to buy Indian financial products.

An interest rate future is a futures contract with an underlying instrument that pays interest. The contract is an agreement between the buyer and seller for the future delivery of any interest-bearing asset.

The interest rate futures contract allows the buyer and seller to lock in the price of the interest-bearing asset for a future date.

Understanding Interest Rate Futures

An interest rate future can be based on underlying instruments such as Treasury bills in the case of Treasury bill futures traded on the CME or Treasury bonds in the case of Treasury bond futures traded on the CBOT, which is a division of the CME. Other products such as CDs, Treasury notes, and Ginnie Mae securities are also available to trade as underlying assets of an interest rate future. The most popular interest rate futures are the 30-year, 10-year, five-year, and two-year Treasuries, as well as the Eurodollar.

Interest rate futures as mentioned before can have any interest-bearing security as the underlying asset. These futures contracts are a legal agreement to either deliver the interest-bearing security at expiration or settle the contract in cash. Most often, futures are cash-settled. Interest rate futures are traded on centralized exchanges and have a few specific components.

- Underlying asset – the interest-bearing security the value of the interest rate future is dependent on

- Expiration date – the date in which the contract will be settled, either through physical delivery or if it is cash settled, this will be the last cash settlement

- Size – the total nominal amount of the contract

- Margin requirement – For cash-settled futures, this is the initial amount needed to enter into the futures contract, as well as the maintenance margin that the initial margin will need to stay above

There are a number of different types of interest rate futures, depending on the underlying instrument. These futures can also be short-term or long-term. Short-term interest rate futures have an underlying instrument with a maturity of less than one year, while long-term interest rate futures have an underlying instrument with a maturity of over one year.