Page 138 - DMGT513_DERIVATIVES_AND_RISK_MANAGEMENT

Mahesh Kumar Sarva, Lovely Professional University
Unit 10: Interest Rate Derivatives and Euro-Dollar Derivatives

Unit 10: Interest Rate Derivatives and Notes
Euro-Dollar Derivatives

CONTENTS

Objectives
Introduction
10.1 T-Bill and T-Bond Futures
10.1.1 T-Bill Futures

10.1.2 T-Bond Futures
10.2 Euro-Dollar Derivatives
10.3 Forward Rate Agreement
10.4 Duration
10.5 Convexity

10.6 Summary
10.7 Keywords
10.8 Review Questions

10.9 Further Readings
Objectives

After studying this unit, you will be able to:
 Define Interest rate futures
 Describe T-bill and T-bond futures

 Illustrate Euro-dollar derivatives
 State the meaning of forward rate agreements
 Define duration and convexity

Introduction

According to RBI guidelines, interest rates derivatives have been launched in India on National
Stock Exchange (NSE) and Bombay Stock Exchange (BSE) on June 24, 2003. This has enabled the
Scheduled Commercial Banks (SCBs) (excluding Regional Rural Banks and Local Area Banks),
Primary dealers and specified All India Financial Institutions, to hedge the interest rate risk in
their underlying government securities portfolio by booking a future transaction on payment
of a small premium to insure the unexpected liability that may arise in future.
To begin with, it has been decided by RBI to start trading in only two kinds of interest rate
futures contracts on the following underlying securities

1. Notional Treasury Bills
2. Notional 10 year bonds (coupon bearing and non-coupon bearing)

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