Interest Rate Derivatives - Markets, Products, Trading, Clearing, Settlement and Regulation
Domain 1 - Interest Rate Derivatives
This domain tests the rupee interest-rate complex: exchange-traded interest rate futures (IRF), OTC forwards, FRAs, interest rate swaps and overnight indexed swaps, plus trading, clearing, settlement and regulation. NISM expects working knowledge of pricing, hedging and the settlement mechanics, not just product names.
Core rules and concepts
- IRF are cash-settled futures on a notional Government of India security. NSE's 10-year contract has Rs 2,00,000 face value, is quoted per Rs 100 face value, and ticks in 0.25 paise (Rs 0.0025). No G-Sec is delivered.
- Final settlement price is 100 minus the yield (in per cent) of the underlying G-Sec, polled by FIMMDA, so the contract converges linearly to yield.
- OTC products are bilateral under ISDA documentation: FRAs fix a future deposit rate, IRS exchange fixed for floating interest on a notional principal, and OIS references the overnight benchmark (FBIL MIBOR).
- Exchange trades are novated to the clearing corporation, marked to market daily and margined. Rupee OTC swaps are being centrally cleared through CCIL under RBI's phased mandate.
- SEBI regulates exchange-traded IRF; RBI regulates OTC derivatives and money markets; users must show underlying exposure.
Worked example: DV01 hedge
A Rs 100 crore portfolio has modified duration 7.5, so DV01 = 100 crore × 7.5 × 0.0001 = Rs 7,50,000 per basis point. A 10-year IRF at 95.00 has modified duration 7.2 and DV01 = 2,00,000 × 7.2 × 0.0001 = Rs 144 per bp. Contracts = 7,50,000 / 144 = 5,208.3, so sell 5,208 futures. A face-value hedge (100 crore / 2 lakh = 5,000) leaves duration mismatch.
Traps
- Hedging on face value rather than DV01.
- Assuming IRF settles by delivery or that final price is a discounted bond price.
- Confusing initial margin with daily MTM - both are payable.
- Ignoring basis risk between the portfolio and the notional 10-year bond.