What are Interest Rate Futures?

INTEREST RATES FUTURES

Futures written on fixed income instruments as the underlying securities are known as interest rate futures. Predetermined periodical income through the life of such instruments and principle maturity amount at the end of the instrument’s life are the usually the features of such securities. These instruments have become an integral part of all balance portfolios and accordingly the growth of these securities has grown substantially. But ever since, interest rates on fixed income instruments have become highly volatile, the need for suitable hedge against this volatility has risen.

Thus, two prime-movers for the growth of interest rate futures are:

1. the tremendous growth in the fixed income securities, and
2. increased volatility in the interest rates in the market.

In order to hedge against the risks arising as a result of these two factors, interest rate futures come in handy apart from other hedging instruments like interest-rates swaps. Interest rate futures can be used to hedge against interest rate risk and to crystallize future investment yields or future cost of borrowing.