Interest Rate Derivatives

Syllabus and chapter weightage

Weightages are taken from the official syllabus table published in the NISM workbook, so you can see exactly where the marks are.

Every chapter can be read free, no account needed — tap a chapter to open its plain-English Foundation lesson.

Sample questions

5 questions from the chapter tests, one per chapter. Pick your answer before you open the explanation.

1. Question 1 · Chapter 1: Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Markets

   Ramesh borrows Rs 1,00,000 from Suresh for 3 months at 6% p.a. and instead of a loan agreement gives a written Note that can be sold to a third person. In market vocabulary, what has Ramesh created?

   1. A.A debt instrument or debt security, which is tradable
   2. B.A loan, which is generally non-tradable
   3. C.An equity security, since a Note confers ownership
   4. D.A derivative, since its value depends on the interest rate
   Show the answer

   Answer: A. A debt instrument or debt security, which is tradable

   A written promise that can be assigned to somebody else for a payment is a debt instrument / debt security — and its defining feature is tradability. A loan, by contrast, is generally non-tradable, and the lender carries the borrower's risk right up to repayment. This single difference is why a debt market exists at all: with a bond, the holder can transfer the risk to another risk-taker through pricing; with a loan, they cannot. Ramesh becomes the Issuer, Suresh the Investor, and 6% is the yield on the date of transaction.

2. Question 2 · Chapter 2: Interest Rate Derivatives

   Which of the following best captures the workbook's general definition of a derivative?

   1. A.The underlying is independent, and the derivative is dependent on and derived from the underlying; the derivative cannot exist without the underlying
   2. B.The derivative is independent, and its price is set by demand and supply for the derivative itself
   3. C.A derivative is any contract that settles on the same day as its underlying asset
   4. D.A derivative is any contract requiring full payment of the contract value on the trade date
   Show the answer

   Answer: A. The underlying is independent, and the derivative is dependent on and derived from the underlying; the derivative cannot exist without the underlying

   The workbook's wording is precise: "the underlying is independent, and the derivative is dependent on and derived from the underlying. The derivative cannot exist without the underlying." Option (b) inverts the causation — the first accounting criterion implies that the price of a derivative is determined by the price of the underlying, and not by demand-supply for the derivative. Option (c) contradicts the second criterion, which requires the derivative to settle later than the underlying. Option (d) contradicts the third criterion — no full cash outlay on the trade date — which is exactly what provides leverage.

3. Question 3 · Chapter 3: Exchange Traded Interest Rate Futures

   In the futures market, which contract term is NOT decided by the exchange?

   1. A.The price
   2. B.The expiry date
   3. C.The lot size
   4. D.The tick size
   Show the answer

   Answer: A. The price

   The workbook's framing sentence for the whole chapter is: "In futures market, exchange decides all the contract terms of the contract other than price." Expiry date, quantity (lot size) and tick size are all standardised in advance by the exchange. Price alone is discovered through the free interaction of buyers and sellers on the centralised trading platform.

   That is the essential difference from a forward, where each contract is custom designed and hence unique in terms of contract size, expiration date, asset quality and asset type, and price comes mainly from negotiation.

4. Question 4 · Chapter 4: Exchange Traded Interest Rate Options

   The price which the option buyer pays to the option seller to acquire the right is called the ________.

   1. A.Premium
   2. B.Strike price
   3. C.Agreed price
   4. D.Settlement price
   Show the answer

   Answer: A. Premium

   "The price which option buyer pays to option seller to acquire the right is called as option price or option premium." In the workbook's land example, the Rs 50,000 non-refundable upfront fee Mr X paid Mr Y is the premium.

   Option (b) is the classic confusion: the strike price is the pre-specified price at which the underlying asset may be purchased or sold by the option holder — Rs 10,00,000 in that same example. Two different amounts doing two different jobs: the premium buys the right, the strike is the price at which the right can be used.

5. Question 5 · Chapter 5: Strategies using Interest Rate Derivatives

   What distinguishes arbitragers from speculators in the derivatives market?

   1. A.Arbitragers generally lock in their profits by entering opposite transactions simultaneously, whereas traders trade naked contracts
   2. B.Arbitragers take a stronger directional view on the market than speculators do
   3. C.Arbitragers operate only in the cash market while speculators operate only in derivatives
   4. D.Arbitragers are exempt from margin requirements while speculators are not
   Show the answer

   Answer: A. Arbitragers generally lock in their profits by entering opposite transactions simultaneously, whereas traders trade naked contracts

   "Importantly, arbitragers generally LOCK IN their profits unlike traders who trade NAKED contracts." They identify mispricing and lock in a profit by simultaneously entering opposite side transactions in two or more markets, and the workbook is explicit that "they have neither exposure to risk and nor do they take the risk."

   Option (b) inverts the position — arbitragers take no view on market direction at all. The workbook's own example proves the point: whether the underlying ends at 108 or 95, the profit is exactly Rs 500 either way.

   What they do bring is liquidity: arbitragers and traders "fetch enormous liquidity to the products traded on the exchanges," which results in better price discovery, lesser cost of transaction and lesser manipulation.

Frequently asked questions

What is the passing mark for NISM Series IV?

You need 60% to pass NISM-Series-IV: Interest Rate Derivatives. On a 100-mark paper that is 60 marks.

Is there negative marking in NISM Series IV?

There is negative marking of 25% of the marks for that question, so a wrong answer costs you 0.25 marks on a 1-mark question. Guess only when you can eliminate at least two options.

How long is the NISM Series IV exam?

The exam runs for 120 minutes and carries 100 marks in total.

How long is the NISM Series IV certificate valid?

NISM certifications are generally valid for 3 years from the date of passing, after which they must be renewed. Confirm the current position on nism.ac.in before your certificate lapses.