A futures contract with an interest-paying underlying product is called an interest rate futures contract (IR). To put it another way, contracts are an agreement between a buyer and seller that promises to deliver something of value in the future. It is possible to lock in the price of an interest-bearing asset at some point in the future by purchasing and selling interest rate futures contracts by investor app.
An Explanation of Interest Rate Futures
Interest rate futures are available on both the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). A Demat account can be opened and used for trading purposes.
Government bonds or T-Bills are used as the basis for these futures contracts. Government of India securities (NBF II) are Traded on the NSE for six, ten, and 13 years, and 91-day Government of India Treasury Bills (91DTB). All interest rate futures NSE contracts are settled in cash.
What’s the Procedure?
Due to the inverse relationship between the interest rate and the bond price, bond prices fall when rates go up and vice versa when rates go down.
Assume an investor has a long position in a bond and plans to sell it at a higher price. The bond’s value will decrease if interest rates rise. Thus, a rise in interest rates is a threat to this investor. As long as bonds are included in the contract as an underlying asset, their value will decline. To compensate for a decrease in the value of their bonds, these investors can sell these futures and repurchase them at a lower price.
Interest Rate Futures: Characteristics and Uses
Now that we’ve examined what interest rate of future and option trading are, we can move on to some more critical components.
Advantages of futures trading in interest rate
Here are some of the perks:
Who can benefit from Indian interest rate futures?
Interest rate futures are only suitable for a select few types of investors.
Derivative traders: Interest rate futures (futures) are best suited to those who trade derivatives (futures). This new financial product may be a good option if you already know how to trade derivatives and understand various economic cycles.
Professionals understanding how interest rate movement happens: Several professionals and analysts understand how interest rate movement occurs in different economic cycles. If you’re successful in predicting changes in interest rates, these interest rate futures could provide you with a substantial financial return (IRF).
Investors of tax free bonds: For those who have invested in tax-free bonds and believe that interest rates will rise, their tax-free bond value will decline. You may consider using interest rate futures to protect yourself if this is the case. On the other hand, your tax-free bond price would fall, and you would gain in interest rate futures, so this is only a theoretical amount.
Banks protect from risks: Banks protect themselves from risk by investing in government bonds, which is required by banking law. Due to a rise in interest rates, they must take a financial hit. Interest rate futures can be used as insurance against potential losses.
Conclusion
NSE and BSE have just introduced an interest rate futures contract. A concept as dated as the future itself. One way to make good money in the financial markets is to be an expert at forecasting interest rate fluctuations.
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