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.
Where this is taught
- Series IX · Chapter 1: Introduction to the Capital Marketintroduced here
- Series V-D · Chapter 19: Interest Rate Derivativesintroduced here
- Series IV · Chapter 2: Interest Rate Derivativesintroduced here
- Series V-D · Chapter 20: Exchange Traded Interest Rate Futures
- Series IV · Chapter 3: 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.