Print Friendly, PDF & Email

Interest Rate Derivatives

Topics Covered:

  1. Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.


Interest Rate Derivatives


What to study?

For Prelims and Mains: Meaning of Interest Rate Derivatives and swap- their significance.


Context: The Reserve Bank of India (RBI) has allowed non-residents to participate in the rupee interest rate derivatives market. This decision was taken with a view to deepening the rupee interest rate swap (IRS) market.

  • With this decision, non-residents of India can undertake rupee interest rate derivative transactions on recognised stock exchanges, electronic trading platforms and over the counter markets (OTCs).


What is an Interest-Rate Derivative?

An interest-rate derivative is a financial instrument with a value that increases and decreases based on movements in interest rates. Interest-rate derivatives are often used as hedges by institutional investors, banks, companies and individuals to protect themselves against changes in market interest rates, but they can also be used to increase or refine the holder’s risk profile.


What is an Interest Rate Swap?

An interest rate swap is a forward contract in which one stream of future interest payments is exchanged for another based on a specified principal amount. Interest rate swaps usually involve the exchange of a fixed interest rate for a floating rate, or vice versa, to reduce or increase exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than would have been possible without the swap.


Sources: the hindu.