What are Interest Rate Futures?

\(A\) defines the way in which the number of days between the two days is calculated, usually a notional or 30. \(B\) defines the way in which the total number of days in the reference period is measured, usually 360 or 365. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.

CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.

The interest rate futures contract allows the buyer and seller to lock in the price of the interest-bearing asset for a future date. Interest rate futures are futures contracts based on an interest-bearing financial instrument. Since the value is based on an underlying asset, an interest rate future is considered a financial derivative. The underlying asset can be any interest-bearing instrument, such as Treasury bills, Treasury bonds, or Eurodollars. The buyer and seller of an interest rate futures contract can lock in the price of an interest-bearing asset for a future date.

RBI’s policy rate was expected to stay at 6.5% until the end of 2024. On 28 September, New Zealand-based ANZ Research forecast India’s inflation to average 6.5% in 2022, easing to 4.8% in 2023 and 4.5% in 2024. The government of India, in consultation with the RBI, sets the Consumer Price Index inflation target every five years.

Forecast, as of 9 December, suggests inflation in India could average at 5.5% in 2023, easing to 4.4% in 2024 and 4% in 2025. In May 2022 the MPC started the policy tightening cycle amid soaring inflation that reached 7.9% in April – a level not seen since 2014. In March 2020, as the global economy came to interest rate futures in india a standstill following the emergence of the Covid-19 pandemic, the Reserve Bank of India interest rate was cut by 75bp to 4.4%. In May 2020, the committee cut the rate by another 40bp to help the economy weather the slowdown. The ClearTax Future Value Calculator displays the future value of the investment.

This segment goes the safe way through bank deposits earning less than 4% annualized returns. There is a potential of it being invested into the fixed income market if given greater leverage and better liquidity. The pension and provident funds could further use futures for their duration management. The saving schemes offered by government, earning from 3% to 9% returns, drive the chunk of fixed income investments. This could be well diversified, depending on how the risk appetite changes, per capita income increases and as the households become more educated.

Common Day Count Conventions

Explain and calculate a US Treasury bond futures contract conversion factor. 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. 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.

• So if you held a contract until expiry, you would have to either buy/sell from a basket of deliverable Bonds mandated by the Exchanges.
• A Bond when issued for the first time by GOI, has a face value to it, which is basically the amount of money the issuer pays the holder of the Bond when the Bond matures.
• The 883 contracts are quite liquid, and the volumes should pick up as the product gets popular, it is just the 1st week of trading.
• Once in five years, the government of India, in consultation with the RBI, sets the Consumer Price Index inflation target.

Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. ClearTax can also help you in getting your business registered for Goods & Services Tax Law. You may use the ClearTax Future Value Calculator from the comfort of your house and calculate the future value of your investments in seconds. Compounding is a process where the earnings of the assets are reinvested to earn additional earnings over time.

Further, when the repo rates rise, banks and financial institutions hike FD rates to attract depositors. Hence, repo rate changes are directly linked to an increase in your FD rates. For interest-rate futures India, the underlying asset is an interest rate carrying bond or stocks. Now, if the interest rate falls, the price of the futures contracts will go up.

Advantages of interest rate futures

The underlying security for an interest rate futures contract is usually a 10-year government security. Repo rate is the rate at which the Reserve Bank of India lends to different banks. The central bank hikes these rates when they need to control inflation or restrict money supply in the economy. An increase in the rate of interest would mean that a bank will have to pay more for the funds it borrows from RBI. To maintain their profitability under such circumstances, banks, in turn, increase the lending interest rates levied to the general public and businesses.

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Investors are requested to note that Stock broker is permitted to receive/pay money from/to investor through designated bank accounts only named as client bank accounts.

U.S. Treasury Bonds Futures Contracts

Also, futures of next few expiry dates are traded simultaneously. It is literally impossible to deliver an exact 10 year or a specific time maturity bond as they are issued or auctioned at different times depending on debt requirements of the governments. Therefore the futures contracts are either cash settled based on a calculation method or have a delivery grade3 for physical settlement. They are used for speculation in interest rates as well for hedging various loan portfolios. In 2003, trading in Interest Rate future contracts was introduced but it failed to take off due to various reasons.

These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. The contract can be cash-settled or it can involve the delivery of the underlying security. You must be wondering how changes in interest rate can affect you.

What are Interest Rate Futures Used For?

FocusEconomics reports cover over 130 economies and 30+ key commodities. Since the next coupon is $4 per $100 face value and 40 of the 183 days between coupon payments have passed. A bond quoted at 102–20 has accrued $2.54 in interest over the last six months.

Stock broker is also required to disclose these client bank accounts to Stock Exchange. Hence, you are requested to use following client bank accounts only for the purpose of dealings in your trading account with us. The details of these client bank accounts are also displayed by Stock Exchanges on their website under “Know/ Locate your Stock Broker”. Interest rate futures are used to hedge against the risk of that interest rates will move in an adverse direction, which may cause a loss.

Save taxes with ClearTax by investing in tax saving mutual funds online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. It helps you to set financial goals such as buying a dream house, doing retirement planning, or investing for a child’s higher education and marriage. Banks were prohibited from taking trading positions in these contracts, depriving early liquidity. But before you invest in any scheme, it is mandatory to ensure you have a clear idea about its return potential. When it comes to FD, there is no risk of market fluctuations, and the profit solely comes from the interest your corpus generates.

The bank reduced its repo rate by 75bps to 4.4% in March 2020 and by another 40bps to a record-low of 4% in May 2020. As per banking law, banks are supposed to invest in Govt of India bonds. They can hedge their losses by investing in interest rate futures. Food inflation is an important economic indicator used by the Indian government and the central bank. It is critical to keep an eye on domestic food prices in a country with the world’s second largest population.

Interest rate futures are futures contracts based on interest-bearing financial instruments. This futures contract can be cash-settled or it can involve the delivery of the underlying security. Like other futures, this is an agreement for the long position to receive the interest earned on a notional amount and the short position to pay this amount. Let’s imagine you have a home loan of Rs 50 lakh, and you expect interest rates to rise in a particular length of time, say six months or a year, as a result of RBI policy. You could sell an interest rate futures contract to mitigate the risk of rising EMIs as interest rates climb. If interest rates rise, the value of these futures contracts will decrease, and you will be able to repurchase them.