Exchange Traded Interest Rate Futures is worth 10 of the 30 marks in NISM V-D's Module 3 — and unlike the equity derivative chapters, almost nobody arrives with a background in it. This guide covers the contract as the March 2026 workbook describes it, and the hedging logic the exam builds on it.
What an interest rate future is
A standardised, exchange-traded agreement to buy or sell an interest-bearing instrument — or to settle against an interest rate — at a price fixed today, on a date fixed today. Like any future: margins from both sides, standardised lot and expiry, daily mark-to-market, and "buy" and "sell" are figurative because for a cash-settled contract nothing changes hands but the profit or loss.
The underlying may be an interest rate (overnight MIBOR), an interest-bearing instrument (a government security) or an index of such instruments (an 8–13-year G-Sec index).
The Indian contract — and why it looks the way it does
India first launched interest rate futures in 2009: physically settled, on a notional 10-year bond, with delivery from a basket via a cheapest-to-deliver methodology. The workbook is blunt about the result — the cheapest-to-deliver mechanics and physical settlement were drawbacks, and the product did not trade.
The contract that succeeded, from 2014, is a cash-settled single-bond future on the on-the-run 10-year GOI security. No delivery, no basket, no CTD — the future settles against the price of one specific liquid bond. Exchanges have since added futures on 6-year and 13-year GOI securities and on bond indices, and 91-day T-bill futures are a separate contract.
The exam tests both halves: what the current contract is, and why the earlier one failed.
Contract terms to know
| Term | Meaning |
|---|---|
| Lot / contract size | The standardised quantity of the underlying per contract (bonds are quoted per Rs 100 face value; lots are in face-value multiples) |
| Tick size | The minimum price move allowed in quotations |
| Expiry | The last trading day. For monthly single-bond futures, the last Thursday of the month; if that is a holiday, the previous trading day |
| Daily settlement price (DSP) | The price at which open positions are marked to market each day; MTM margins flow from losers to gainers |
| Final settlement price (FSP) | Derived from the underlying bond's price on the last trading day; all open positions are settled to it in cash |
| Open position | Net of longs and shorts in the same contract — 5 short in one bond future and 3 long in T-bill futures are two open positions, not one |
| Rollover | Closing the current month's position and opening the same position in the next expiry |
Price and yield run opposite ways
Everything in this chapter rests on one relationship: when yields rise, bond prices fall, and the futures price falls with them. The size of the move is governed by duration — a portfolio of modified duration 6 loses about 3% for a 50-basis-point rise in yields (−6 × 0.5%).
The payoffs
A long future at Rs 100: underlying at 101 on expiry, profit Rs 1; at 99, loss Rs 1. A short future is the mirror. Cash-settled, so only the difference is exchanged. Drawn against the underlying's price at expiry, the payoff is a straight line through the futures price — the same diagram as an equity future, and the exam expects you to read it either way.
Hedging a bond portfolio
The use case the exam returns to:
A fund holds a long bond portfolio and expects rates to rise. Rising rates → prices down → loss. Hedge by selling interest rate futures: the short position gains as prices fall. Size the hedge from the portfolio's value and duration relative to the future's, so that the futures gain approximately offsets the cash loss.
A fund expects rates to fall and wants exposure before it has the cash. Buy futures; profit as prices rise; unwind when the bonds are bought.
The synthetic T-bill. Buy a long bond and sell three-month futures on it. The short future locks in the price the bond will fetch in three months, collapsing the effective maturity to three months — a synthetic risk-free instrument. If its yield beats the cash-market T-bill yield, it is a yield-enhancement trade. The workbook's own example, and a regular question.
What the exam asks
- What is the underlying of the main Indian IRF? — the on-the-run 10-year GOI bond, cash settled.
- Why did the 2009 contract fail? — physical settlement and cheapest-to-deliver.
- When does the monthly contract expire? — last Thursday.
- Rates expected to rise: buy or sell futures? — sell.
- Duration 6, yields +50 bp: change in value? — about −3%.
- Long bond plus short three-month future creates what? — a synthetic T-bill.
Practise the chapter free, then the two that follow it — Interest Rate Options and Strategies — or see the full V-D syllabus.