NISM Series V-D · Chapter 20: Exchange Traded Interest Rate Futures

L1 · Foundation

Foundation — Futures basics, the terminology set, and payoff charts

What a futures contract is and how it differs from a forward, the three failed Indian attempts before the 2013 success, the full futures vocabulary from underlying to open interest, the four position terms, and the linear payoff of long and short futures.

16 min read · Worth 7% of the paper · Written from pages 512–536 of the official NISM workbook · Updated 18 September 2026

What a futures contract is

"Futures markets were innovated to OVERCOME THE LIMITATIONS OF FORWARDS. A futures contract is an agreement made through an ORGANIZED EXCHANGE to buy or sell a FIXED AMOUNT of a commodity or a financial asset on a FUTURE DATE at an AGREED PRICE. Simply, futures are STANDARDISED FORWARD CONTRACTS THAT ARE TRADED ON AN EXCHANGE. The CLEARING CORPORATION GUARANTEES SETTLEMENT of trades done on Exchange."

"A trader, who BUYS futures contracts generally takes a LONG position and the one, who SELLS futures, takes a SHORT position. The words buy and sell are FIGURATIVE ONLY because NO MONEY OR UNDERLYING ASSET CHANGES HAND, between buyer and seller, WHEN THE DEAL IS EXECUTED."

Features of a futures contract

"In futures market, EXCHANGE DECIDES ALL THE CONTRACT TERMS of the contract OTHER THAN PRICE." Accordingly:

"Contract between two parties THROUGH EXCHANGE"
"CENTRALISED TRADING PLATFORM i.e., Exchange"
"PRICE DISCOVERY through FREE INTERACTION of buyers and sellers"
"MARGINS are payable BY BOTH THE PARTIES"
"EXPIRY DATE decided today (standardized)"
"QUANTITY decided today (standardized LOT SIZE)"

Everything except price is decided by the Exchange. Price is the one thing the market decides.

20.1 Interest Rate Futures in India — three attempts

"Interest Rate Futures (IRF) are STANDARDIZED interest rate derivative contracts traded on a RECOGNIZED STOCK EXCHANGE to buy or sell a NOTIONAL SECURITY or any other interest-bearing instrument or an INDEX of such instruments or interest rates at a specified future date, at a price determined at the time of the contract. Interest Rate Futures INCLUDE MONEY MARKET FUTURES ALSO."

"For banks, financial institutions and businesses, the exposure to RUPEE INTEREST RATE RISK is MUCH MORE SEVERE than that to CURRENCY RISK AND EQUITY RISK. Accordingly, one would expect that the interest rate derivatives market would be larger than that for currency and equity derivatives. However, in India interest rate derivatives TOOK OFF ONLY IN THE THIRD ATTEMPT IN 2014."

Attempt	Date	What was launched	Outcome
First	June 2003	"three futures contracts on 91-day Treasury Bill, 6% 10Y notional bond and ZERO-COUPON 10Y notional bond"	"The launch was NOT SUCCESSFUL, and the contracts were WITHDRAWN SOON THEREAFTER"
Second	August 2009	"bond futures on a notional 7% 10Y GOI bond"	"As the settlement... was on the basis of a 'CHEAPEST-TO-DELIVER' methodology, this was ALSO NOT ADOPTED BY THE MARKET"
(interim)	March 2011	"another futures on 91-day Treasury bill... followed by two more futures on 2Y bond and 5Y bond"	Also unsuccessful
Third — the success	December 2013 guidelines, live 2014	"cash settled interest rate futures (IRF) on 10-year Government of India Securities... a CASH SETTLED SINGLE BOND FUTURES, based on the ON-THE-RUN 10-year GOI bond"	"has been a SUCCESS"
Extension	June 2015	"SEBI and RBI have permitted the exchanges to launch Interest rate futures on 6-year and 13-year GOI securities"	—
Extension	10 January 2023	SEBI circular SEBI/HO/MRD/MRD-PoD-3/P/CIR/2023/11, "Introduction of futures contracts on CORPORATE BOND INDICES"	—

"The product design of interest rate derivatives launched PRIOR TO DECEMBER 2013 suffered from the drawbacks such as CHEAPEST TO DELIVER, PHYSICAL SETTLEMENT, ZERO COUPON YIELD CURVE etc. WHICH LED TO THEIR FAILURE."

"Over all, Exchange-traded derivatives have been MORE SUCCESSFUL IN EQUITY AND CURRENCY THAN IN INTEREST RATE MARKETS. However, there is LOT OF SCOPE FOR GROWTH of Interest Rate Futures market."

20.1.1 The terminology set

Term	Definition
Underlying Asset	"the underlying can be INTEREST RATE (e.g. Overnight MIBOR) or INTEREST-BEARING INSTRUMENT (Government Securities) or INDEX of interest-bearing instrument (8–13-year G-Sec index, corporate bond index) or NOTIONAL SECURITY (10Y notional Government Securities)"
Spot price / rate	"The price/interest rate at which the underlying asset TRADES IN THE SPOT MARKET"
Futures price / rate	"The CURRENT price/rate of the specified FUTURES CONTRACT"
Quantity Freeze	"the MAXIMUM NUMBER of derivatives contracts/lots... that can be traded IN A SINGLE ORDER... to maintain market stability by preventing large, unintended orders that could distort prices, and to reduce the chance of 'FAT FINGER' ERRORS"
Contract Cycle	"the period over which a contract trade... can be monthly, quarterly, in some cases weekly. In monthly contracts: NEAR MONTH (immediate month), MID-MONTH (next month), FAR MONTH (subsequent month). These contracts can extend up to ONE YEAR"
Expiry date	"Also called LAST TRADING DAY... the day on which TRADING CEASES. If the expiry date is a trading holiday the contract expires ON THE DAY BEFORE"
Tick Size	"MINIMUM MOVE ALLOWED in the price/rate quotations", e.g. Rs 0.0025 gives prices of 99.9975, 100.0000, 100.0025
Contract Size / Lot Size	"the MINIMUM AMOUNT OF ASSET that has to be delivered for a single contract"
Contract Value	"multiply the PRICE/RATE with CONTRACT MULTIPLIER or LOT SIZE"
Base Price	"reference price for trading for start of the day. On the FIRST day of trading... the THEORETICAL FUTURES PRICE. On subsequent trading days... the DAILY SETTLEMENT PRICE as computed by Clearing Corporation"
Price Band	"the price range... within which contract can be traded for that day. Generally specified as a +/-% to base price"; where there is none, a dummy operating range avoids erroneous orders
Mark to Market (MTM)	"positions... are marked-to-market to the DAILY SETTLEMENT PRICE at the END OF EACH TRADE DAY. The exchange/CC COLLECTS these margins from the LOSS-MAKING participants and PAYS TO THE GAINERS on DAY-TO-DAY basis"
Daily Settlement Price (DSP)	"weighted average futures price (VWAP) of the trades generally in the LAST 30 MINUTES of trading (i.e., close price), IF CLOSE PRICE IS NOT AVAILABLE THEN THEORETICAL PRICE"
Final Settlement Price (FSP)	"All open positions on the LAST TRADING DAY... shall be marked to the final settlement price... mainly DERIVED FROM THE UNDERLYING MARKET"
Final Settlement	"CASH settled: only the profit and loss... shall be paid/received. PHYSICAL settlement: participants have to physically give/take DELIVERY OF BONDS"
Open Interest	"the TOTAL NUMBER OF CONTRACTS OUTSTANDING (yet to be settled)... number of long futures as well as number of short futures IS EQUAL TO the Open Interest... ONLY ONE SIDE of contracts is considered. The level of open interest INDICATES DEPTH IN THE MARKET"

The four position terms

Long position — "Outstanding/unsettled BUY position." Mr X buys 5 contracts on single bond futures → long on 5 contracts.
Short position — "Outstanding/unsettled SELL position." Mr X sells 5 contracts → short on 5 contracts.
Open position — "Outstanding/unsettled EITHER long (buy) OR short (sell) position in various derivative contracts." The chapter's worked illustration: Mr X shorts 5 contracts of 6.10% GOI bond futures and longs 3 contracts of 91-day T-Bill futures. Next day he sells 2 T-Bill contracts of the same maturity, so his open position becomes short 5 GOI bond futures and long 1 T-Bill futures contract — the sale of 2 reduced the long 3 to a long 1.
Opening a position — "buying or selling a contract, which INCREASES client's open position."
Closing a position — "buying or selling a contract, which essentially results in REDUCTION of client's open position... he SELLS a contract which he had BOUGHT before or he BUYS a contract which he had SOLD earlier."

Rollover

"a rollover position indicates that a trader is CARRYING FORWARD their existing position... to the NEXT EXPIRY CYCLE. This involves CLOSING THE CURRENT MONTH'S CONTRACT AND SIMULTANEOUSLY OPENING A NEW POSITION IN THE NEXT MONTH'S CONTRACT."

"Rollover is typically expressed as a PERCENTAGE of total positions. There are NO SPECIFIC BENCHMARKS for rollovers. However, they are compared based on their HISTORICAL DATA, generally on the TRAILING THREE-MONTH AVERAGE. On most of the occasions, 'LOWER-THAN-AVERAGE' rollover signals UNCERTAINTY, while HIGHER rollovers indicate STRONG SENTIMENTS and the ongoing momentum to continue."

The seven important points about futures

"All open future positions are subject to MTM."
"Future positions can be OFFSET by taking an OPPOSITE POSITION (SQUARE OFF)."
"Participant can choose to ROLLOVER the future contract."
"Traders need to TRACK POSITIONS REGULARLY."
"Trader is SOLELY RESPONSIBLE for maintaining margins."
"Future trade is ZERO SUM EQUATION, i.e. PROFIT OF A TRADER IS EXACTLY EQUAL TO LOSS OF OPPOSITE TRADER."
"Futures trade offers UNLIMITED PROFIT AND UNLIMITED LOSSES."

20.2 Payoff charts

"Pay off on a position is the PROFIT/LOSS that would accrue to a market participant WITH CHANGE IN THE PRICE OF THE UNDERLYING ASSET AT EXPIRY. The pay-off diagram is graphical representation showing the PRICE OF THE UNDERLYING ASSET ON THE X-AXIS and PROFITS/LOSSES ON THE Y-AXIS."

"In case of futures contracts, LONG AS WELL AS SHORT position has UNLIMITED PROFIT OR LOSS potential. This results into LINEAR PAY OFFS."

Long futures

"a person goes long in a futures contract at Rs 100... if on expiry, the price of the underlying is Rs 101, then this person will buy at Rs 100... and will immediately be able to sell the underlying in the cash market at Rs 101, thereby making a PROFIT OF RS 1. Similarly, if the price... falls to Rs 99 at expiry, he would have to buy at Rs 100... and if he sells the same in the cash market, he will receive only Rs 99, translating into a LOSS OF RS 1. If it is cash settled futures contract then participant will either RECEIVE/PAY ONLY PROFIT/LOSS AMOUNT."

Market price at expiry	Long futures payoff
98.0000	−2.0000
98.5000	−1.5000
99.0000	−1.0000
99.5000	−0.5000
100.0000	0.0000
100.5000	+0.5000
101.0000	+1.0000
101.5000	+1.5000
102.0000	+2.0000

"We do not draw the X axis on the Left-Hand Side, AS PRICES CANNOT GO BELOW ZERO... long futures position MAKES PROFITS WHEN PRICES RISE."

Short futures

"a person goes short... at Rs 100... if on expiry, the price... is Rs 99, then the person will buy from underlying in cash market at Rs 99 and will sell at Rs 100, as per the futures contract, thereby making a PROFIT OF RS 1. Similarly, if the price... increase to Rs 101... he would have to buy at Rs 101 in the cash market and sell at Rs 100 in the future market, translating into a LOSS OF RS 1... a short futures position would MAKE PROFITS WHEN PRICES FALL."

Market price at expiry	Short futures payoff
98.00	+2.0000
99.00	+1.0000
100.00	0.0000
101.00	−1.0000
102.00	−2.0000

"The payoff graph for futures displays a LINEAR OR SYMMETRICAL style."

Think of it like this

The Exchange fixes everything except the price

One sentence explains the whole difference between a future and a forward: "In futures market, EXCHANGE DECIDES ALL THE CONTRACT TERMS of the contract OTHER THAN PRICE." Lot size, expiry date, tick size, settlement mode, deliverable grade — all pre-set. Think of the Indian Railways: the train, the route, the timing and the coach layout are fixed by the railway; only the fare moves with demand. A forward is a private taxi — you negotiate destination, timing and price — which is exactly why it suits your needs perfectly and why nobody else can take over your booking.

Buy and sell are "figurative only"

The chapter warns you off a natural misreading: "The words BUY AND SELL ARE FIGURATIVE ONLY because NO MONEY OR UNDERLYING ASSET CHANGES HAND, between buyer and seller, WHEN THE DEAL IS EXECUTED." You have not bought a bond when you buy a bond future. You have entered an obligation — and, in a cash-settled contract, one that will never produce a bond at all: "participant will either receive/pay ONLY profit/loss amount." What changes hands on day one is margin, paid by both parties, to the Clearing Corporation — not to each other.

Three attempts, and what killed the first two

India took eleven years and three tries to make interest rate futures work, and the chapter names the causes of death precisely: "CHEAPEST TO DELIVER, PHYSICAL SETTLEMENT, ZERO COUPON YIELD CURVE etc." Each added complexity the market would not swallow — cheapest-to-deliver meant you never knew which bond you would get; physical settlement meant you had to actually source and deliver a government security. The 2013 redesign removed all three: cash settled, single bond, on-the-run 10-year GOI. Simplicity was the product feature that finally worked.

Open interest counts one side only

A point students consistently double-count: "number of long futures as well as number of short futures IS EQUAL TO the Open Interest. This is because TOTAL NUMBER OF LONG FUTURES WILL ALWAYS BE EQUAL TO TOTAL NUMBER OF SHORT FUTURES. ONLY ONE SIDE of contracts is considered." If 100 contracts are outstanding, there are 100 longs and 100 shorts, and open interest is 100, not 200. Think of a marriage register: every marriage has two people, but the register counts marriages. And "the level of open interest indicates DEPTH IN THE MARKET" — it measures commitment, not turnover.

Rollover as a sentiment thermometer

Rollover is mechanically simple — "closing the current month's position and taking the position in the next month's contract" — but the chapter treats it as a market signal. "There are NO SPECIFIC BENCHMARKS"; you compare against "the TRAILING THREE-MONTH AVERAGE", and "LOWER-THAN-AVERAGE rollover signals UNCERTAINTY, while HIGHER rollovers indicate STRONG SENTIMENTS." It is like season-ticket renewals on a commuter route: the absolute number tells you little, but a sharp drop against last quarter tells you people have stopped believing the journey is worth continuing.

Linear payoff: the 45-degree line

Every rupee the underlying moves is a rupee to the long and a rupee from the short, in both directions, without limit. The tables make it visible: at 98 the long is −2 and the short +2; at 102, exactly reversed. "The payoff graph for futures displays a LINEAR OR SYMMETRICAL style." There is no kink and no floor — which is precisely what distinguishes a future from an option, whose payoff bends at the strike. Remember it as a straight road versus a hockey stick, and half of Chapter 21 becomes easy.

Zero sum, and why that matters

"Future trade is ZERO SUM EQUATION, i.e. PROFIT OF A TRADER IS EXACTLY EQUAL TO LOSS OF OPPOSITE TRADER." This is not a moral observation; it is how MTM can work at all. The Clearing Corporation "COLLECTS these margins from the LOSS-MAKING participants and PAYS TO THE GAINERS on DAY-TO-DAY basis" — the money it pays out each evening is exactly the money it collected that evening. Nothing is manufactured. Combine it with "unlimited profit and unlimited losses" and you have the reason margins are compulsory for both parties.

Why the X-axis starts at zero

A small but revealing detail in the chapter's description of the payoff chart: "We do not draw the X axis on the Left-Hand Side, AS PRICES CANNOT GO BELOW ZERO." Prices are bounded below at nil; profit and loss are not. So the chart is asymmetric in its axes even though the payoff line itself is perfectly symmetric. For a long future bought at Rs 100, the worst case is the underlying going to zero — a loss of Rs 100 per unit — while the gain has no ceiling. "Unlimited loss" for a long is therefore shorthand for "very large", whereas for a short it is literal.

Key terms in this chapter

Backwardation: Futures price below spot price, giving positive basis. It may signal strong current demand or tight supply, and is the usual state of bond futures.
Base Price: The reference price for the start of the day. On the first day of a contract it is the theoretical futures price; thereafter it is the previous daily settlement price.
Basis: The difference between spot price and futures price. Positive when futures are below spot (backwardation); negative when futures are above spot (contango).
Cash and carry model assumptions: Underlying available in abundance, easy to hold and maintain, can be sold short, no transaction costs, no taxes, no margin requirements.
Cheapest-to-deliver: The settlement methodology used in the failed August 2009 attempt, under which the seller could choose which of several bonds to deliver. The market did not adopt it.
Clean price: The quoted price of a bond excluding accrued interest. Cash settled GOI bond futures trade and settle at clean price for a face value of Rs 100.
Contango: Futures price above spot price, giving negative basis. It can indicate expectations of increased supply or decreased demand in future.
Contract Cycle: The period over which a contract trades. In monthly contracts, near month is the immediate month, mid-month the next, and far month the one after.
Convergence: Futures and spot prices converge at maturity, since at that point there can be no difference between them. All futures contracts on expiry settle at the underlying cash market price.
Conversion Factor: For physically settled 10-year notional bond futures, the price of the deliverable security on the first of the delivery month, computed to yield 7 per cent.
Corporate Bond Index Futures (CBIF): Cash settled futures on indices of corporate debt rated AA+ and above, permitted by SEBI circular dated 10 January 2023.
Cost of carry / financing cost: The interest paid to finance or carry the asset until the expiry date of the contract.
Daily Settlement Price (DSP): The volume weighted average futures price of trades generally in the last 30 minutes of trading; if no close price is available, the theoretical price.
Deliverable grade securities: For physically settled 10-year notional futures, GOI securities maturing at least 7.5 but not more than 15 years from the first day of the delivery month with minimum outstanding stock of Rs 10,000 crore.
Dirty price / Cash price: Clean price plus accrued interest. It is the starting point of the futures pricing computation.
Expectancy model: Futures price is nothing but the expected spot price in future. Relevant especially where the asset cannot be sold short or stored. Futures may trade at a premium or a discount to spot.
FBIL: Financial Benchmark India Pvt. Ltd, an independent benchmark administrator for interest rates and foreign exchange. It publishes the Overnight MIBOR and the T-Bill yield curve.
FIMMDA: Fixed Income Money Market and Derivatives Association of India. Exchanges select the underlying GOI bond in consultation with FIMMDA, and FIMMDA polling determines settlement prices for 2-year and 5-year notional bond futures.
Final Settlement Price (FSP): The price to which all open positions on the last trading day are marked. It is mainly derived from the underlying market.
Fisher effect: Ceteris paribus, an increase in the expected inflation rate leads to an increase in the nominal interest rate. It is why interest rate derivatives are the primary instruments available to hedge inflation risk.
Forward rate: An interest rate applicable to a transaction that will take place in the future, derived from spot rates on a no-arbitrage basis.
Futures contract: An agreement made through an organized exchange to buy or sell a fixed amount of an asset on a future date at an agreed price. Standardised forward contracts traded on an exchange.
Income on cash position: Accrued interest expected on expiry, plus any coupon received during the contract, plus interest earned on reinvesting that coupon.
Interest Rate Futures (IRF): Standardized interest rate derivative contracts traded on a recognized stock exchange on a notional security, an interest-bearing instrument, or an index of such instruments or rates. They include money market futures.
Market completion: The key public policy objective in introducing IRF: expanding the set of hedging tools available to financial and non-financial entities.
Mark to Market (MTM): Daily revaluation of positions to the daily settlement price. The exchange or CC collects from loss-making participants and pays gainers day by day.
NDS-OM: The underlying trading platform for government securities, whose prices provide the final settlement price of cash settled GOI bond futures and whose hours the IRF trading hours align with.
On-the-run bond: The most recently issued and most liquid bond of a given maturity. The successful 2013 IRF is a cash settled single bond future on the on-the-run 10-year GOI bond.
Open Interest: The total number of contracts outstanding and yet to be settled. Longs equal shorts, and only one side is counted. Its level indicates depth in the market.
Open position: Any outstanding, unsettled long or short position across derivative contracts.
Payoff chart: A graph with the underlying price at expiry on the X-axis and profit or loss on the Y-axis. Futures payoffs are linear and symmetrical.
Price Band: The maximum and minimum price for the day within which a contract can trade, usually a percentage of the base price. Where there is none, a dummy operating range prevents erroneous orders.
Quantity Freeze: The maximum number of contracts or lots that can be traded in a single order, set by exchanges to prevent large unintended orders and fat finger errors.
Rollover: Closing the current month position and simultaneously opening one in the next month, to carry a position past expiry. Compared against the trailing three-month average; lower than average signals uncertainty, higher signals strong sentiment.
Square off: Offsetting a futures position by taking an opposite position in the same contract.
Tick Size: The minimum move allowed in price or rate quotations. Rs 0.0025 for all three live IRF contracts.
Tick value: The rupee change in contract value for one tick move. Rs 5.00 for GOI bond futures, Rs 1.25 for T-Bill futures, Rs 102.75 for MIBOR futures.
True hedge: A hedge that genuinely matches the exposure. The chapter notes that Overnight Index Swap, though successful, does not answer the description of a true hedge for the outstanding stock of GOI securities.
Zero sum equation: In futures, the profit of one trader is exactly equal to the loss of the opposite trader.

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Original explanatory writing based on the official NISM workbook for Series V-D, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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