Market side rule
Expecting rates to rise means going long on interest rate: sell GOI bond futures, buy bond puts, sell T-Bill futures, but BUY Overnight MIBOR futures, since MIBOR futures are quoted in rate not price.
This one is not written up yet
The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.
Written up from the same chapter
- 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.
- 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.
- Butterfly spreadA four-legged position — one option bought at a low strike, two sold at a middle strike and one bought at a high strike, all of the same expiry — that caps the unlimited loss of a short straddle.
- Covered callHolding the underlying in the cash market and writing a call against it — a way of earning premium income from a holding, at the cost of capping the gain above the strike.
- Diagonal spreadTwo options of the same type on the same underlying with both a different strike and a different expiry — the most complicated of the three spread families, and the only one that varies on both axes.
- 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.
Where this is taught
Free preparation for NISM Series V-D← All terms