Unit ko samjho · NISM Series IV
Interest Rate Derivatives
10 questions is unit mein
Sawaal aur jawaab English mein hain, kyunki NISM ka exam paper bhi English mein hota hai.
Is unit mein kya hai
- Which feature makes a contract an interest-rate derivative rather than a direct purchase of a bond?
- A bank sells bond futures to offset part of its long fixed-rate bond portfolio’s interest-rate exposure. Which statement best describes the derivative’s economic role?
- A treasurer wants a bilateral contract today fixing a reference interest rate for a single borrowing period that starts three months from now. Which instrument most directly fits?
- A swap party pays fixed 7% and receives floating 6.4% on ₹10 crore for a 90/360 accrual period. Assuming one net settlement and no other cash flows, what does this party pay or receive?
- A borrower wants protection when a reference borrowing rate rises above 8%, while retaining the benefit of lower reference rates. Ignoring premium affordability and credit-spread changes, which structure best fits?
- An OTC interest-rate derivative market-maker wants to transfer its position to another eligible market-maker. Under the RBI framework, which arrangement is consistent with novation?
- A derivative is explicitly a call option on a fixed-coupon bond’s price, not on its yield. Other things equal, which movement is generally favourable to the call buyer?
- Two counterparties negotiate an interest-rate swap on an electronic trading platform outside a recognised stock exchange. Does the electronic channel alone make it exchange-traded under the RBI definition?
- Why can standardised contract sizes and expiry dates support liquidity in exchange-traded interest-rate futures?
- A treasurer buys a payer swaption giving the right to enter a pay-fixed, receive-floating swap in six months. Which obligation exists solely because the treasurer bought the swaption?
Zaroori ideas
Practice bank se · 1
Which feature makes a contract an interest-rate derivative rather than a direct purchase of a bond?
An interest-rate derivative derives its value from rates, instrument prices or interest-rate indices. It can transfer interest-rate exposure without funding an outright investment in the underlying instrument. Contract notional, market value and the cash required at inception are separate quantities. Remember: Identify the referenced variable and payoff rule, not just whether a bond is mentioned.
Hint Common mistake: Equating derivative notional with a funded bond investment.
IV-031Practice bank se · 2
A bank sells bond futures to offset part of its long fixed-rate bond portfolio’s interest-rate exposure. Which statement best describes the derivative’s economic role?
The bond portfolio generally loses value when yields rise, while a short bond-price futures position can gain. Combining them can reduce net sensitivity. A hedge transfers and reshapes risk but still leaves potential basis, and operational risks. Success is assessed on the combined exposure, not on each leg making money. Remember: Evaluate hedging by risk reduction across the combined position.
Hint Common mistake: Judging a hedge as failed solely because the derivative leg lost money.
IV-032Practice bank se · 3
A treasurer wants a bilateral contract today fixing a reference interest rate for a single borrowing period that starts three months from now. Which instrument most directly fits?
An FRA is an OTC derivative referencing a rate for a specified forward period. Its settlement reflects the difference between an agreed fixed rate and the contractual floating reference, applied to notional and the relevant period. It need not involve exchanging the borrowing principal, and the actual loan’s credit spread may remain unhedged. Remember: Match the derivative’s reference period and rate to the exposure.
Hint Common mistake: Assuming an FRA itself supplies the funds needed for the borrowing.
IV-033Practice bank se · 4
A swap party pays fixed 7% and receives floating 6.4% on ₹10 crore for a 90/360 accrual period. Assuming one net settlement and no other cash flows, what does this party pay or receive?
Fixed payment = ₹10 crore × 7% × 90/360 = ₹17,50,000. Floating receipt = ₹10 crore × 6.4% × 90/360 = ₹16,00,000. The fixed payer therefore pays a net ₹1,50,000. The notional scales interest. The question does not require a principal exchange. Remember: Calculate the two legs or their signed rate difference over the same accrual fraction.
Hint Common mistake: Confusing the gross fixed payment with the net swap settlement.
IV-034Practice bank se · 5
A borrower wants protection when a reference borrowing rate rises above 8%, while retaining the benefit of lower reference rates. Ignoring premium affordability and credit-spread changes, which structure best fits?
A cap consists of caplets paying when the reference rate exceeds the . It can offset rising floating-rate payments while leaving a borrower exposed to beneficial rate falls. The premium is a real hedging cost, and a cap on the reference rate does not necessarily cap the borrower’s credit spread or all fees. Remember: For a borrower, the adverse reference-rate direction is usually upward.
Hint Common mistake: Confusing a rate cap with a put option on the rate itself.
IV-035Practice bank se · 6
An OTC interest-rate derivative market-maker wants to transfer its position to another eligible market-maker. Under the RBI framework, which arrangement is consistent with novation?
The current RBI directions allow market-maker assignment through novation subject to specified conditions, including prior consent of the remaining party and a tripartite agreement. The outgoing party steps out and the transferee steps in. The original contract is replaced with otherwise identical parameters. This is distinct from simply closing an exchange position through an offsetting trade. Remember: Counterparty replacement is a contractual process, not just an internal trade-book transfer.
Hint Common mistake: Using the word novation without checking whose consent and documentation are needed.
IV-036Practice bank se · 7
A derivative is explicitly a call option on a fixed-coupon bond’s price, not on its yield. Other things equal, which movement is generally favourable to the call buyer?
Option direction must be identified from the stated underlying. A call on bond price gains as that price rises. For a conventional fixed-cash-flow bond, lower required yield normally raises price. A call directly on an interest rate would have a different directional exposure. Remember: “Call” alone does not tell you whether rising interest rates are favourable.
Hint Common mistake: Treating every interest-rate call as a bet on rising yields.
IV-037Practice bank se · 8
Two counterparties negotiate an interest-rate swap on an electronic trading platform outside a recognised stock exchange. Does the electronic channel alone make it exchange-traded under the RBI definition?
RBI’s OTC definition expressly includes transactions on electronic trading platforms when not undertaken on exchanges. Standardisation, clearing and venue status must be examined separately. It is therefore incorrect to use “electronic” and “exchange-traded” as synonyms. Remember: Trading technology and market structure are separate classifications.
Hint Common mistake: Assuming an electronic screen necessarily implies exchange rules and CCP clearing.
IV-038Practice bank se · 9
Why can standardised contract sizes and expiry dates support liquidity in exchange-traded interest-rate futures?
When contract terms are shared, participants can enter and offset positions in the same order book. This can improve fungibility and liquidity compared with many unique bilateral contracts. The trade-off is that a specific user’s amount, date or benchmark may not match the standard contract precisely. Remember: Standardisation pools liquidity but can introduce hedge mismatch.
Hint Common mistake: Assuming the most liquid standard contract is automatically an exact hedge.
IV-039Practice bank se · 10
A treasurer buys a payer swaption giving the right to enter a pay-fixed, receive-floating swap in six months. Which obligation exists solely because the treasurer bought the swaption?
A swaption is an option on entering an interest-rate swap. For a payer swaption, the possible underlying position pays fixed and receives floating. The premium buys flexibility: the holder follows the exercise terms only when choosing to use the right, whereas a forward-starting swap creates a binding future swap commitment. Remember: Distinguish an option on a swap from a swap with a future start date.
Hint Common mistake: Assuming every future-dated interest-rate contract is already an unconditional swap.
IV-040Liquidity describes how easily a given quantity can be traded.
Aage padhoThe strike price is the level at which an option can be exercised.
Aage padhoIntrinsic value is the part of an option's premium that would survive if the contract expired at this instant.
Aage padho