Interest Rate Futures – How to Trade?

Interest rate futures Interest Rate Futures – How to Trade?

Interest rate futures, the most widely traded derivatives instrument in the world, is relatively at nascent stage in India. Interest rate futures also called Bond Futures is a futures contract with a debt instrument that pays interest as underlying asset. It is a contract to buy or sell a debt instrument at a specified future date at a fixed price that is determined today.

In India, interest rate futures contract are based on Government Bond or T-Bill as underlying securities. Both NSE & BSE launched trading in Interest rate futures during January 2014 with futures contract based on 10 year government securities. All futures contracts available for trading on NSE are cash settled. And currently, exchange traded Interest Rate Futures on NSE are

  • standardized contracts based on 6 year, 10 year and 13 year Government of India Security (NBF II)
  • standardized contracts based on 91-day Government of India Treasury Bill (91DTB).
  • FBIL (Board of Financial Benchmarks India Pvt Ltd) Overnight Mumbai Interbank Outright Rate (MIBOR)

MIBOR is the new benchmark rate for unsecured loans of one day duration fixed by the Board of Financial Benchmarks India Pvt Ltd (FBIL) based on the actual transactions in the inter-bank call money market.

CLICK HERE to view the Product Specification available in NSE website

Interest rate futures market in India is still struggling to gain momentum though 5 years have passed since its commencement. To augment the market, RBI allowed foreign portfolio investors to participate in Indian interest rate futures market since March 2018. Off late, retail investors in India have started investing in bond market which was hitherto used mainly by institutions and banks as an asset class. With more and more active participation by all type of investors, interest rate futures market is set to grow in line with global market. To ride the growing market segment, we need to understand how to trade interest rate futures. Before that, let us see the benefits of interest rate futures.

Benefits of interest rate futures

  • It is one of the risk management tool. It is used for hedging the interest rate risk. Borrowers can hedge the risk in fluctuation in interest rates by taking an opposite position in interest rate futures.
  • No securities transaction tax (STT) on trades. Hence, transaction cost is less.
  • At NSE single collateral pool can be used for both currency and interest rate futures

How to trade interest rate futures
Like bonds, the prices of interest rate futures contracts are inversely related to actual interest rates prevailing in the economy. CLICK HERE to know about Bonds. When the real interest rate goes up, bond prices will fall and when real interest rate falls, then bond prices will go up. So,

  • if you expect the RBI to increase the interest rate, then go short in interest rate futures
  • If you expect the RBI to reduce the interest rate, then go long in interest rate futures

Minimum Initial Margin
The minimum initial margin for cash settled interest rate future contract is 1.5% of the value of the contract subject to minimum of 2.8% on the first day of trading and for 91-Day T-Bill futures contracts minimum of 0.10% of the notional value of the futures contract on the first day of trading and 0.05% of the notional value of the futures contract thereafter (The notional value of the contract shall be Rs 200000) will be scaled up by look ahead period as may be specified by the Clearing Corporation from time to time.

Click here to view our Margin Calculator

Currently available contracts at NSE
Currently three months contracts and three quarter contracts are available at NSE to trade.

CLICK HERE to view the currently available contracts at NSE

The only contract that is actively traded currently is 717GS2028 280219. Below is the traded details of 717GS2028 on 1st February, 2019.

Last Traded Price – 97.09
Volume (contract) – 85,736
Value in crores – 1674.13
No. of Trades – 4135

Interest Rate Futures trading facility with Tradeplus
Investors enabled for currency segment can trade in interest rate futures. It is available on NOW trading platform as well as ITS platform on all modes viz., exe., web and mobile app.

Below is “NOW” trading platform Screen shot

infini now Tradeplusonline Interest Rate Futures – How to Trade?

Below is Infini Power exe version screen shot

Interest Rate Futures Interest Rate Futures – How to Trade?

Summary of important points to know about interest rate futures contracts

Segment                               – Currency
Instrument Type                – FUTIRC / FUTIRT / ONMIBOR
Symbol                                 – 717GS2028
(717 means 7.17% coupon rate, GS stands for government
securities and 2028 means maturity year 2028)
Unit of Trading                    – 1 lot of 2000 bonds
Contract Value                    – 1 lot of 2000 bonds*Rs.100 (bond price) = Rs.200,000/-
Tick Zize                               – Rs.0.0025
Expiry Day                           – Last Thursday of every month
Trading Hours                    – Monday to Friday 9 a.m to 5 p.m

Conclusion

Trading in interest rate futures is comparatively cost effective as it does not attract STT and it is also easy to trade. Moreover, the margin requirement is also less. In India though it is yet to catch up, interest rate futures is definitely going to be a widely traded instrument in India very soon.

Please view our FAQ section on Interest Rate Futures

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