Interest Rate Futures
Also written IRF · Interest Rate Futures (IRF) · Bond futures · G-sec futures · Exchange traded interest rate futures
A standardised exchange-traded contract to buy or sell a notional government security, or an interest rate itself, at a price agreed today for settlement on a future date.
In plain language
An interest rate future locks a price for a bond — or a rate for money — today, for a date in the future.
Both sides are committed. Unlike an option, there is no right to walk away: the buyer must take the agreed price if the market has fallen, and the seller must accept it if the market has risen. The pay-off is therefore linear and symmetrical, a straight line through the trade price. Long futures gain when prices rise; short futures gain when prices fall.
The contracts trade on the currency derivatives segment of the exchanges and are regulated jointly by SEBI and RBI. Every one of them currently settles in cash — no bonds change hands — with the clearing corporation standing between the two sides.
How it works
The workhorse contract is the cash-settled single-bond future on a GOI dated security, available on bonds with residual maturity of 4–8, 8–11 and 11–15 years, the specific bond chosen by the exchanges in consultation with FIMMDA.
| Specification | Cash-settled GOI bond futures |
|---|---|
| Unit of trading | 1 lot = notional bonds of FV Rs 2,00,000 (2,000 bonds) |
| Quotation | Price based, clean price for FV of Rs 100 |
| Contract value | Trade price × 2,000 |
| Tick size | Rs 0.0025 |
| Price band | ±3% of base price, expandable 0.5% twice a day |
| Trading cycle | 3 serial monthly + 3 quarterly (Mar, Jun, Sep, Dec) |
| Expiry | Last Thursday of the month |
| Settlement | Cash, MTM and final settlement T+1 |
Because the tick is Rs 0.0025 on 2,000 units, one tick is worth Rs 5 per lot, and the contract value at a price of Rs 99.95 is 99.95 × 2,000 = Rs 1,99,900.
The final settlement price is the weighted average price of the underlying bond over the last two hours of trading on NDS-OM; if fewer than five trades are executed in that window, the FIMMDA/FBIL price is used instead.
The money market contracts are quoted differently, and that is where marks are lost. 91-day T-bill futures are quoted as 100 minus the futures discount yield, so a discount yield of 5% gives a price of 95.0000, and the contract value is 2,000 × (100 − 0.25y). Overnight MIBOR futures are quoted as a rate on a notional principal of Rs 5 crore for one month on a 30/365 basis, which makes one basis point worth Rs 411 (= Rs 5 crore × 0.01% × 30/365) and the quarter-basis-point tick worth Rs 102.75.
The formula
Contract value (bond futures) = Futures price × 2,000
Tick value (bond futures) = 0.0025 × 2,000 = Rs 5
Contract value (91-day T-bill) = 2,000 × (100 − 0.25 × y)
Value of 1 bp (91-day T-bill) = 2,000 × 0.25 × 0.01 = Rs 5
Value of 1 bp (MIBOR futures) = 5,00,00,000 × 0.01% × 30/365 = Rs 411
A worked example
The workbook's short hedge, in full.
20 September 2021. Investor X holds Rs 5 crore face value of 6.10% G-Sec 2031 at Rs 100.00 (yield 6.10%). A monetary policy review is due in October and he expects yields to rise — that is, prices to fall. He is long the bond, therefore short the interest rate, and he hedges by selling bond futures.
Number of lots = Rs 5,00,00,000 ÷ Rs 2,00,000 = 250 lots. He sells the October 2021 contract (expiry 28 October) at Rs 99.95.
On expiry the bond is at Rs 98.36 (yield 6.32%). The futures gain is
(99.95 − 98.36) × 250 lots × 2,000 units = Rs 7,95,000
Against three courses of action, the workbook totals the money available on expiry:
| Total available on 28 Oct 2021 | |
|---|---|
| Sell the bond now, park in 91-day T-bills at 3.20% | Rs 5,07,53,106.22 |
| Simply hold the bond | Rs 5,00,86,527.78 |
| Hold the bond and hedge with IRF | Rs 5,08,81,527.78 |
The hedged position wins by Rs 7,95,000 over doing nothing, and by Rs 1,28,421.56 over selling out — because it keeps the accrued interest on the bond while shedding the price risk.
Why NISM asks about it
Chapter 3 (Exchange Traded Interest Rate Futures) is the contract-specification chapter, and section 3.4 on lot size, tick size and the change in contract value per tick is a direct source of calculation questions. Chapter 5 (Strategies using Interest Rate Derivatives) supplies the short hedge, long hedge and duration-based hedging examples.
The recurring question forms are: compute the contract value or the number of lots needed to hedge a stated rupee exposure; convert a price move into a rupee profit for a given number of lots; name the expiry day; and quote the price band. The history in section 3.1 — the failed 2003 and 2009 attempts, the success of the cash-settled 10-year contract after the December 2013 guidelines, the 2015 extension to 6-year and 13-year bonds — is examinable as plain recall.
Common exam traps
- Expiry days differ by contract. GOI bond futures: last Thursday. 91-day T-bill futures: last Wednesday, at 1 p.m. Overnight MIBOR futures: last working day of the month. One rule does not cover all three.
- T-bill futures are quoted as 100 − y, and the 0.25 in the contract value is a quarter of a year, not 91/365. A discount yield of 5% gives a contract value of 2,000 × (100 − 1.25) = Rs 1,97,500.
- Bond futures are quoted on the clean price. Accrued interest is not in the quote; it only enters where physical delivery does.
- No ETIRD contract is physically settled in India today. Exchanges are permitted to launch one, but every live contract is cash settled — which is precisely why hedges are imperfect.
- Futures carry an obligation on both sides. There is no premium, no right to abandon, and the loss on the wrong side is not capped.
- Contract value uses 2,000 units, not Rs 2,00,000. Multiplying a per-100 price by the full face value overstates every answer by a factor of 100.
Check yourself
1.What is the base price of an interest rate futures contract on the first day of its trading, and on subsequent days?
- a)The theoretical futures price on the first day; the daily settlement price computed by the Clearing Corporation thereafter
- b)The daily settlement price on the first day; the theoretical futures price thereafter
- c)The spot price of the underlying on both the first day and subsequent days
- d)The final settlement price of the previous month's contract on both the first day and subsequent days
Show the answer
Answer: (a) The theoretical futures price on the first day; the daily settlement price computed by the Clearing Corporation thereafter
"Base price generally acts as reference price for trading for start of the day. Generally, on the first day of trading (i.e., on introduction) of contract, it would be the theoretical futures price. The base price of the contracts on subsequent trading days would be the daily settlement price of the futures contracts as computed by Clearing Corporation."
The logic is simple: on day one there is no trading history to draw a settlement price from, so a theoretical price must serve as the anchor. This matters practically because the price band is expressed as a percentage of the base price — 3% for GOI bond futures, 1% for 91-day T-Bill futures.
2.When Arjun "buys" an interest rate futures contract on the exchange, what actually changes hands between buyer and seller at the moment the deal is executed?
- a)The buyer pays the full contract value to the seller through the clearing corporation
- b)Nothing — no money or underlying asset changes hands between buyer and seller; "buy" and "sell" are figurative, and the buyer simply takes a long position
- c)The seller delivers the underlying bonds to the buyer's gilt account on T+1
- d)The seller pays the buyer an upfront premium for taking on the obligation
Show the answer
Answer: (b) Nothing — no money or underlying asset changes hands between buyer and seller; "buy" and "sell" are figurative, and the buyer simply takes a long position
The workbook: "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."
What each side does pay is margin. Among the features of futures the workbook lists: "Margins are payable by both the parties."
Why the others are wrong:
- (a) No contract value is paid upfront. Contract value is used to work out margins and charges.
- (c) Nothing is delivered on execution. The IRFs currently active are cash settled at expiry anyway.
- (d) A premium belongs to options, where the buyer pays the writer. Futures have no premium, and both sides have an obligation.
3.India's first attempt at exchange-traded interest rate futures in June 2003 launched which contracts?
- a)Futures on the 91-day Treasury Bill, a 6% 10-year notional bond and a zero-coupon 10-year notional bond of the Government of India
- b)Bond futures on a notional 7% 10-year GOI bond, settled on a cheapest-to-deliver basis
- c)Futures on the 91-day Treasury Bill, followed by futures on 2-year and 5-year bonds
- d)Cash settled single bond futures based on the on-the-run 10-year GOI bond
Show the answer
Answer: (a) Futures on the 91-day Treasury Bill, a 6% 10-year notional bond and a zero-coupon 10-year notional bond of the Government of India
The workbook: "The first attempt in June 2003 launched three futures contracts on 91-day Treasury Bill, 6% 10Y notional bond and zero-coupon 10Y notional bond of Government of India. The launch was not successful, and the contracts were withdrawn soon thereafter."
Each wrong option is a later attempt:
- (b) is the August 2009 second attempt. It was not adopted because settlement used a "cheapest-to-deliver" methodology.
- (c) is March 2011: 91-day T-Bill futures, "followed by two more futures on 2Y bond and 5Y bond."
- (d) is the product introduced after the December 2013 SEBI–RBI guidelines. It "has been a success".
Where this is taught
- Series IV · Chapter 2: Interest Rate Derivativesintroduced here
- Series IX · Chapter 1: Introduction to the Capital Marketintroduced here
- Series V-D · Chapter 19: Interest Rate Derivativesintroduced here
- Series IV · Chapter 3: Exchange Traded Interest Rate Futures
- Series V-D · Chapter 20: Exchange Traded Interest Rate Futures
Related terms
- Basis riskThe risk left over after hedging, because the exposure and the contract used to hedge it do not move identically — in size, in expiry date, or in what they are written on.
- Daily Settlement PriceThe price at which every open futures position is marked and reset at the end of each day — the last 30 minutes' volume weighted average price of that contract, computed separately for each expiry.
- Final Settlement PriceThe price at which a commodity derivative is finally settled at expiry — a simple average of the polled spot prices of the expiry day and the two days before it.
- Forward contractA bilateral, over-the-counter agreement between two parties to buy or sell an asset on a fixed future date at a price agreed today — customised to suit them, and binding on both.
- Futures contractA standardised forward traded on an exchange, where the exchange fixes every term except the price and the clearing corporation guarantees settlement, so neither side carries the other's default risk.
- Tick sizeThe smallest price change a contract may be quoted in — prices move only in whole multiples of it, and it differs from one commodity to another.
- Conversion factorThe multiplier that scales a futures settlement price into a fair invoice price for each bond in the deliverable basket, by valuing that bond at the notional 7% yield.
- Corporate Bond Index FuturesCash-settled futures on an index of corporate debt rated AA+ and above, permitted by SEBI in January 2023 to give the corporate bond market a hedge of its own.
- HedgerA participant who already carries interest rate risk from a real business exposure and uses derivatives to remove it, rather than to take a view on the market.
- Mark to MarketThe daily settlement of a futures position at that day's closing price, so gains and losses are paid in cash every evening instead of accumulating until expiry.
- Price bandThe highest and lowest price at which a contract may trade on a given day, set as a percentage of its base price to block erroneous and manipulative orders.
- Price Value of a Basis PointThe rupee change in a bond's price for a one basis point change in its yield — the unit in which a fixed income desk actually measures and hedges interest rate risk.
- Bond Equivalent YieldThe annualised simple-interest return on a money market instrument, computed on price and a 365-day year, so instruments of different maturities can be compared on one basis.
- Discount yieldThe return on a discount instrument expressed against its face value on a 30-day month and 360-day year — the convention the 91-day T-Bill futures contract is quoted and settled on.
- Forward rateThe interest rate for a period that starts in the future, implied today by two spot rates — because rolling a short investment must return the same as locking in a long one, or arbitrage follows.
- Fisher effectThe proposition that, other things equal, a rise in expected inflation raises the nominal interest rate — which is why interest rate derivatives are the household sector's instrument for hedging inflation.
- Notional bondA theoretical bond with a fixed coupon and maturity that no one has issued — used as a futures underlying so the contract does not depend on the liquidity of any single security.
- Deliverable grade securitiesThe government securities a seller is permitted to deliver against a physically settled bond futures contract — GOI bonds of 7.5 to 15 years from the delivery month with at least Rs 10,000 crore outstanding.
- Cheapest-to-deliverThe bond in the deliverable basket that costs a futures seller least to deliver — and, because the seller chooses, the bond whose cash price the futures contract actually tracks.
- Unit of tradingThe quantity in one contract — for Indian bond and T-Bill futures, notional bonds of Rs 2 lakh face value, which is 2,000 units of Rs 100 — and the reason exposures round rather than match.
- Contract valuePrice or rate multiplied by the lot size or contract multiplier — the number margins, brokerage, transaction charges and regulatory fees are all computed from, and different for every contract.
- Overnight MIBORThe benchmark overnight rupee interbank rate administered by FBIL, and the underlying of India's money market interest rate futures contract, which is quoted as a rate rather than a price.
- Interest rate swapAn agreement to exchange streams of interest payments on a notional principal for a set period — typically fixed against floating — where only the net difference ever changes hands.
- Notional principalThe reference amount interest is computed on in a swap, FRA or money market futures contract — it sizes the exposure and the settlement, but it is never exchanged.
- Duration-based hedge ratioThe number of interest rate futures that drives a bond portfolio's duration to zero — portfolio modified duration times market value, divided by futures modified duration times futures price over par.
- Imperfect hedgeA hedge that cannot fully offset an exposure because the contract is standardised — fixed lot sizes, a fixed expiry date and cash settlement leave a remainder the hedger keeps.
- ArbitragerA participant who locks a profit by entering opposite transactions in two markets at once — carrying no exposure and taking no view, and in the process pulling the two prices back together.
- Bond forwardAn OTC rupee interest rate derivative in which a buyer agrees to buy a specific Government Security from a seller on a future date at a price fixed today — governed by RBI's Directions of 21 February 2025.
- Cash and carry pricingThe no-arbitrage model for bond futures: theoretical futures price = cash (dirty) price + financing cost − income on the cash position, which is accrued interest to the futures settlement date.
- Regular arbitrageBuying a bond in the underlying market and selling futures on the same bond when futures trade above their theoretical price — locking in a pay-off that is the same whether the bond price rises or falls.
- Reverse arbitrageSelling a bond, lending in repo and buying futures on the same bond when futures trade below theoretical value — a locked-in pay-off not open to all, as short selling G-Secs is restricted.
- Position limitsThe maximum open positions the whole market and each trading member or client may hold in interest rate derivatives — set as the higher of a percentage of open interest or a rupee amount, and always specified in lots.
- Expectancy modelThe view that a futures price is simply the market's expected spot price at expiry, so futures can trade at a premium or discount to spot and signal the expected direction of prices.
- Inter-bond spreadA long-short position in futures on two different GOI bonds, usually of the same expiry, taken to express a view on how the yield curve will steepen or flatten.
- Forward Rate AgreementAn OTC contract that locks in an interest rate today for a borrowing or lending period starting later; only the rate difference on a notional principal is settled, in cash.
- Interest-rate derivativesContracts that let borrowers and investors hedge adverse interest-rate movements — interest-rate futures, interest-rate swaps, interest-rate options (caps and floors) and forward rate agreements.
- Clean priceThe quoted price of a coupon bond, excluding interest accrued since the last coupon date. Bonds trade at the clean price and settle at the dirty price, which adds accrued interest.
- Market side ruleThe rule that ties a market participant's buy-or-sell decision in interest rate futures and options to their expectation of rate direction, since bond prices and interest rates move inversely.
- On-the-run bondThe most recently issued, most actively traded Government of India security of a given maturity — the specific named bond that India's live cash-settled single-bond interest rate futures are written on.
- Payoff chartA graph plotting an underlying's expiry price on one axis against a derivative position's profit or loss on the other — a straight, symmetric line for futures, and a kinked, asymmetric one for options.
- Currency Derivatives SegmentThe separate stock exchange segment where exchange-traded currency futures and options, and interest rate derivatives, are traded — with membership separate from the exchange's other segments.
- RBI-SEBI Standing Technical CommitteeThe joint committee constituted after an RBI-SEBI meeting on 28 February 2008 to coordinate the regulators on exchange-traded currency and interest rate futures; its May 2008 report launched currency futures.