Bombay Stock Exchange (BSE), the oldest stock exchange in Asia, recently made an official announcement that it has launched a exchange for trading trading in interest rate options based on Government of India securities. An interest rate option is a financial derivative contract whose value is based on rupee interest rates.
“Bombay Stock Exchange is the first and only exchange to provide trading of Interest rate options,” India’s leading stock exchange said in a press release.
What Is an Interest Rate Option?
An interest rate option is a financial derivative that allows the holder to benefit from changes in interest rates. Investors can speculate on the direction of interest rates with interest rate options. It is similar to an equity option and can be either a put or a call.
In January 2014, the BSE had launched interest rate futures, which has an average market share of 40% and has now expanded its offerings in interest rate derivatives with the launch of options.
These contracts will be a part of the interest rate derivatives in the currency derivatives segment.
“The contracts currently available for trading are based on the underlying government of India securities such as 768GS2023, 668GS2031, 717GS2028, 726GS2029, 795GS2032, 727GS2026, 757GS2033,” BSE said in a statement.
What Do Interest Rate Options Tell You?
As with equity options, an interest rate option has a premium attached to it or a cost to enter into the contract. A call option gives the holder the right, but not the obligation, to benefit from rising interest rates. The investor holding the call option earns a profit if, at the expiry of the option, interest rates have risen and are trading at a rate that’s higher than the strike price and high enough to cover of the premium paid to enter the contract.
Interest rate options will become a support and important mechanism for an efficient tool for managing interest rate risk and exposure through hedging. With a wide array of instruments being made available, investors can hedge their risk across the yield curve, the company said.
BSE was Established in 1875, Bombay Stock Exchanges provides a platform for trading in equity, debt instruments, equity derivatives, currency derivatives, interest rate derivatives, mutual funds and stock lending and borrowing. The BSE provides a host of other services to capital market participants including risk management, clearing, settlement, market data services and education.