Interest rate futures (IRFs) — derivatives that help hedge against interest rate risks — will finally be available from August 31 to all investors. The National Stock Exchange (NSE) has announced the launch of IRFs based on the 10-year government security and has waived transaction charges until December 31.
Until now, investors in the fixed income market could only stand and watch whenever interest rates rose and destroyed the value of their bond portfolio. With interest rate futures, any trader who anticipates a fall in bond prices can go short and make up for any depreciation loss. So far, the only interest rate derivative available to institutions was the less-versatile interest rate swap (IRS) where an investor could exchange a stream of interest payouts with interest payouts of another investor.
“The launch is optimally timed given that monetary cycle is turning around it offers banks a means to hedge interest rate risk on their investment portfolio. This should be seen as a first step towards launching more instruments across the yield curve,” said Hemant Mishr. Traders feel that regulators RBI and Sebi could allow more instruments in future once liquidity in the market increases.
According to B Prasanna, MD & CEO, ICICI Securities Primary Dealership, the move is a significant step in Indian debt market reforms.
“The introduction of IRFs in the current form represents a significant step forward in the development of debt market reforms in India. Interest rate risk is one of the most basic risks faced by all the significant stakeholders in this economy and this product gives them the ability to hedge these risks. Both retail and institutional segments are likely to benefit from this product significantly. And over a period of time, it’s also likely to bring newer and diverse entrants to participate in the fixed income market which has so far been dominated by primary dealers and banks treasuries,” Mr Prasanna said while traders could use the opportunity to take short positions, investors in bonds can take bigger positions using IRFs.
There is also an opportunity to arbitrage by exploiting mis-pricing between cash and futures market. Lastly, the households can hedge their interest rate exposures inherent in their savings (fixed deposits) and borrowings (home loans and car loans) through the government bond yield which is the benchmark for all other interest rates in the economy.
This is not the first time that IRFs are being launched in India. Six years ago, the regulators had made a very cautious attempt to launch this interest rate derivative. However, there are several differences between then and now. Last time, the instrument was an absurd notional zero coupon bond whose pricing did not have any relation to any security in the bond market.
This time around, the security is a 10-year bond, a highly liquid instrument seeing thousands of crores of trade. Last time, banks could not trade which meant they could not take a view that bond prices could fall.
Source: ET
Until now, investors in the fixed income market could only stand and watch whenever interest rates rose and destroyed the value of their bond portfolio. With interest rate futures, any trader who anticipates a fall in bond prices can go short and make up for any depreciation loss. So far, the only interest rate derivative available to institutions was the less-versatile interest rate swap (IRS) where an investor could exchange a stream of interest payouts with interest payouts of another investor.
“The launch is optimally timed given that monetary cycle is turning around it offers banks a means to hedge interest rate risk on their investment portfolio. This should be seen as a first step towards launching more instruments across the yield curve,” said Hemant Mishr. Traders feel that regulators RBI and Sebi could allow more instruments in future once liquidity in the market increases.
According to B Prasanna, MD & CEO, ICICI Securities Primary Dealership, the move is a significant step in Indian debt market reforms.
“The introduction of IRFs in the current form represents a significant step forward in the development of debt market reforms in India. Interest rate risk is one of the most basic risks faced by all the significant stakeholders in this economy and this product gives them the ability to hedge these risks. Both retail and institutional segments are likely to benefit from this product significantly. And over a period of time, it’s also likely to bring newer and diverse entrants to participate in the fixed income market which has so far been dominated by primary dealers and banks treasuries,” Mr Prasanna said while traders could use the opportunity to take short positions, investors in bonds can take bigger positions using IRFs.
There is also an opportunity to arbitrage by exploiting mis-pricing between cash and futures market. Lastly, the households can hedge their interest rate exposures inherent in their savings (fixed deposits) and borrowings (home loans and car loans) through the government bond yield which is the benchmark for all other interest rates in the economy.
This is not the first time that IRFs are being launched in India. Six years ago, the regulators had made a very cautious attempt to launch this interest rate derivative. However, there are several differences between then and now. Last time, the instrument was an absurd notional zero coupon bond whose pricing did not have any relation to any security in the bond market.
This time around, the security is a 10-year bond, a highly liquid instrument seeing thousands of crores of trade. Last time, banks could not trade which meant they could not take a view that bond prices could fall.
Source: ET
