NISM Series IV (Interest Rate Derivatives) cheat sheet

Interest rate = price of borrowing money, quoted as % p.a.; in India short-end benchmarks include call money, TREPS and repo, while the benchmark yield curve is built from G-Secs.

Simple interest convention for money market instruments: price = Face/(1 + r × days/365); for G-Secs, price uses semi-annual compounding with day count actual/actual.

Coupon-bearing G-Sec price = sum of discounted coupons plus discounted face value; yield and price move inversely, and modified duration ≈ Macaulay duration/(1 + y/m).

DV01 (dollar value of 01) = modified duration × dirty price × 0.0001; it measures rupee P&L for a 1 basis point yield move.

Convexity adds a second-order term: ΔP/P ≈ −D_mod × Δy + 0.5 × C × (Δy)²; convexity makes price rises larger than price falls for equal yield moves.

Forward rate from spot yields: (1+z₂)² = (1+z₁)(1+f₁,₂); a forward rate agreement (FRA) settles the difference between the contracted and realised rate on the notional.

Interest Rate Futures on NSE are cash-settled; the deliverable-grade notional is a 10-year 7% coupon G-Sec, and the contract is quoted as 100 minus yield.

Conversion factor (price factor) converts the notional 7% bond to the deliverable bond's price at 6% yield; invoice price = futures price × conversion factor + accrued interest.

Cheapest-to-deliver (CTD) bond maximises (invoice price − market price); it is identified by the smallest net basis or largest implied repo rate.

Exchange-traded IRF contracts on NSE/BSE: underlying notional 10-year 7% G-Sec, 100 − yield quotation, tick size 0.0025, contract size ₹2 lakh face value, cash settlement on final settlement day.

Contract months are the near three months of the March/June/September/December cycle; last trading day is the last Thursday of the expiry month (shifted if a holiday).

Hedging rule: number of contracts = (value of portfolio × D_portfolio)/(contract value × D_ctd); the CTD duration, not the notional 10-year duration, is used.

Basis = spot price of CTD − (futures price × conversion factor); basis converges to zero at expiry, so basis trades profit when convergence is faster than carry cost.

Implied repo rate = [(invoice price − spot price)/spot price] × (365/days to delivery); the CTD has the highest implied repo rate.

Clearing corporation novates trades, collects initial and mark-to-market margin, and maintains a settlement guarantee fund; MTM is settled daily in cash.

SEBI regulates IRFs under the SEBI (Stock Exchanges and Clearing Corporations) Regulations; RBI regulates the underlying G-Sec market via its gilt and money market directions.

Position limits: trading members and clients are subject to SEBI-set limits in IRFs; FIIs/FPIs may access IRFs subject to FPI regulations and RBI limits.

Settlement follows T+1 for exchange-traded IRFs; cash settlement is based on the final settlement price derived from the polled yield of the notional bond.

Interest rate swaps (OIS, MIFOR, MIBOR) are OTC and cleared through CCIL; SEBI regulates exchange-traded IRFs, RBI regulates OTC swaps and CCIL.

Regulatory reporting: OTC interest rate swaps must be reported to a trade repository (CCIL) within the prescribed time under RBI directions.