Interest rate option
Encyclopedia
Interest rate option is a derivative financial instrument.
Interest Rate Options are a form of Exchange Traded Derivative whose underlying value is the rate on various Financial Interest rates,including treasury bills, and bonds. The exchange of these is monitored and facilitated by the CME Group
.
An Interest rate is similar to an equity option. There are two types, Calls and Puts. Calls give the bearer the right, but not the obligation, to benefit off a rise in interest rates. A put gives the bearer the right, but not the obligation, to profit off a decrease in interest rates.
All of these options are cash settled. A quantity of bonds does not have to be delivered, but the differences between the interest rates are settled using a scale of 100, much like equity options are. Interest Rate options, however, differ from equity options in that excise in the European style. This allow the option to be excised only on a specified date and not at any point leading up to it.
Speculating on interest rates, or on any investment, is a risky strategy. Interest rate options should only be used by sophisticated investors with a high tolerance for risk.
The global market for exchange-traded interest rate options is notionally valued by the Bank for International Settlements
at $3,075,400 million in 2005.
http://www.cmegroup.com/trading/interest-rates/files/IR-247_Options-on-Interest-Rate-Swap-Futures-Fact-Card.pdf
Interest Rate Options are a form of Exchange Traded Derivative whose underlying value is the rate on various Financial Interest rates,including treasury bills, and bonds. The exchange of these is monitored and facilitated by the CME Group
CME Group
The CME Group bases prices for US gasoline on Brent Crude rather than West Texas Intermediate Crude , which many believe is responsible for artificially high gas prices for US consumers...
.
An Interest rate is similar to an equity option. There are two types, Calls and Puts. Calls give the bearer the right, but not the obligation, to benefit off a rise in interest rates. A put gives the bearer the right, but not the obligation, to profit off a decrease in interest rates.
All of these options are cash settled. A quantity of bonds does not have to be delivered, but the differences between the interest rates are settled using a scale of 100, much like equity options are. Interest Rate options, however, differ from equity options in that excise in the European style. This allow the option to be excised only on a specified date and not at any point leading up to it.
Speculating on interest rates, or on any investment, is a risky strategy. Interest rate options should only be used by sophisticated investors with a high tolerance for risk.
The global market for exchange-traded interest rate options is notionally valued by the Bank for International Settlements
Bank for International Settlements
The Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
at $3,075,400 million in 2005.
See also
http://www.cmegroup.com/trading/interest-rates/files/IR-257-Interest-Rate-Product-Guide.pdfhttp://www.cmegroup.com/trading/interest-rates/files/IR-247_Options-on-Interest-Rate-Swap-Futures-Fact-Card.pdf
- Derivative (finance)Derivative (finance)A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...