Interest Rate Derivatives
10 questions. Each answer is explained.
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Learn these topics
More units in NISM Series IV
- Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Market30
- Exchange Traded Interest Rate Futures20
- Exchange Traded Interest Rate Options22
- Strategies Using Exchange Traded Interest Rate Futures and Options24
- Trading Mechanism in Exchange Traded Interest Rate Derivatives10
- Clearing, Settlement and Risk Management of Interest Rate Derivatives16
- Regulatory Framework for Interest Rate Derivatives8
- Accounting and Taxation of Interest Rate Derivatives4
- Code of Conduct and Investor Protection Measures in Interest Rate Derivatives6
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | 25% · 0.25 marks off per wrong answer |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | Not published by NISM |
NISM Series IV Interest Rate Derivatives
Exam rules read on NISM's site on 3 October 2026. Check the current rules on NISM's site (opens in a new tab)
What these answers assume, and when it was last checked
Each question uses the rules listed below. We last checked them on 5 September 2026. A Budget or SEBI circular can change a rate, lot size or expiry day. If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.
- NSE uses Tuesday expiry and BSE uses Thursday expiry. This applies from 1 September 2025.
- The January 2026 index lot sizes are NIFTY 65, BANKNIFTY 30, FINNIFTY 60, MIDCPNIFTY 120 and NIFTYNXT50 25.
- The October 2024 SEBI framework sets a minimum index contract value of Rs 15–20 lakh. Each exchange may list one weekly benchmark index.
- Option buyers pay the premium upfront from 1 February 2025. A short index option has an extra 2% Extreme Loss Margin on expiry day from 20 November 2024.
- Equity short-term capital gains are taxed at 20%. Long-term gains are taxed at 12.5% above Rs 1.25 lakh. Both rates apply from 23 July 2024.
- F&O income is non-speculative business income in ITR-3. NSE equity derivatives trade from 9:15 a.m. to 3:40 p.m.
- The final ten-minute session began on 3 August 2026. It aligns with the cash market Closing Auction Session.
- Most Securities Transaction Tax questions test the base and who pays. On an option sale, it is the premium and the seller pays. On a futures sale, it is the traded value and the seller pays.
- On exercise, Securities Transaction Tax uses intrinsic value: settlement price minus strike price. The buyer pays it.
- Two questions test the current rate. From 1 April 2026, option sales carry 0.15% on the premium and futures sales carry 0.05% on traded price. The earlier rates were 0.10% and 0.02% from 1 October 2024.
- This section uses the T+1 rolling settlement cycle. Obligations are fixed on T+1. A short delivery goes to buy-in auction on T+1 and settles on T+2.
- The trade-for-trade surveillance segment uses direct close-out. Funds pay in by 10:30 a.m. and pay out on or after 1:30 p.m. on settlement day.
- Securities pay in to the settlement pool by 10:30 a.m. They pay out directly to the client’s demat account by 3:30 p.m.
- The 3:30 p.m. deadline replaced 1:30 p.m. under SEBI’s 10 October 2024 circular. Direct client credit was required by SEBI’s 5 June 2024 circular.
- The optional T+0 cycle trades until 1:30 p.m. Obligations are fixed by 2:30 p.m. on the trade day. An early pay-in shortage is closed out directly.
- Cash-market Value at Risk margin is six times exponentially weighted moving-average volatility. It has a 9% floor for Group I, a 21.5% floor for Group II, and a fixed 50% or 75% level for Group III.
- Extreme Loss Margin is 3.5% for a share and 2% for a broad-market-index exchange traded fund. Mark-to-market margin is collected before the next day’s trading. The trade-for-trade segment has 100% upfront margin.
- Close-out uses the higher of the highest price from trade day to auction day and 20% above the auction day’s official close.
- A funds shortage costs 0.07% a day. The trading facility is withdrawn at a shortage of Rs 5 lakh or more.
- SCORES allows 21 calendar days, then two 15-day review levels. Online Dispute Resolution moves from conciliation to arbitration after the market participant and SCORES steps.
- At NSE, the Investor Protection Fund limit is Rs 35 lakh per investor for each defaulting or expelled member. This applies to claims arising after 13 August 2024.
- A Basic Services Demat Account has no annual maintenance charge up to Rs 4 lakh of holdings. It costs up to Rs 100 above that, until the Rs 10 lakh eligibility ceiling. These slabs apply from 1 September 2024.
- The rupee pairs are USD-INR, EUR-INR, GBP-INR and JPY-INR. The cross-currency pairs are EUR-USD, GBP-USD and USD-JPY.
- Each contract covers 1,000 units of the foreign currency, except JPY-INR. JPY-INR covers 100,000 yen and is quoted in rupees per 100 yen.
- The tick is 0.25 paise, or Rs 0.0025. It equals Rs 2.50 a contract.
- Rupee pairs trade from 9:00 a.m. to 5:00 p.m. A monthly contract stops trading at 12:30 p.m. two working days before the expiry month’s last business day.
- Final settlement is in cash at the FBIL reference rate on expiry day. FBIL, Financial Benchmarks India, has published this rate in place of the Reserve Bank since 2018. Premium-style European options are quoted in rupees. The buyer pays the premium in cash on T+1.
- Daily settlement is on T+1 and final settlement is on T+2.
- NSE Clearing circular 026/2020 sets SPAN margin plus Extreme Loss Margin. The futures margin is 0.50% for USD-INR, 0.15% for EUR-INR, 0.25% for GBP-INR and 0.35% for JPY-INR. A short option has 0.75%. These figures apply from 1 June 2020.
- A USD-INR client may hold 6% of total open interest or USD 20 million, whichever is higher. A trading member may hold 15% or USD 100 million.
- A resident user has one USD 100 million equivalent limit across all rupee pairs and exchanges. No document is needed below that limit, but a valid underlying contracted exposure must still exist. This clarification applies from 3 May 2024.
- The currency segment has no Securities Transaction Tax.
The exam figures (questions, time, pass mark, negative marking and certificate validity) come from NISM's own pages, read on 3 October 2026. Timed practice uses the same figures. Study with the official workbook as well.
The written-out answers on this page are hidden while your timed set runs.
All 10 questions on Interest Rate Derivatives, with answers
Q1Which feature makes a contract an interest-rate derivative rather than a direct purchase of a bond?
Option A. It must transfer legal ownership of the whole bond principal to the buyer as soon as it is agreed
Why it is wrong: Many interest-rate derivatives use notional amounts and cash settlement.
Option B. Its return must always equal the coupon paid on a benchmark Government of India bond
Why it is wrong: A derivative payoff is specified by its contract, not necessarily by a bond’s coupon.
Option C. It must give both parties a fixed, positive payoff, whatever happens to interest rates
Why it is wrong: Derivative payoffs depend on the underlying and can be positive or negative.
Option D. Its value or settlement depends on an interest rate, interest-bearing instrument or related index — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Equating derivative notional with a funded bond investment.
IV-031easyconceptual
Q2A 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?
Option A. It transfers some price risk to counterparties willing to take the other side — Correct answer
Option B. It cancels the issuers’ duty to repay the bonds held in the bank’s portfolio
Why it is wrong: The original bond contract remains in force.
Option C. It stops market interest rates from changing until the futures contracts expire
Why it is wrong: A hedge does not control the market-wide underlying rate.
Option D. It guarantees a positive profit on both the bond portfolio and the futures position
Why it is wrong: The hedge is designed for offset, so one leg may lose while the other gains.
Answer: A. 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, liquidity 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, shown before you answer in practice mode: Common mistake: Judging a hedge as failed solely because the derivative leg lost money.
IV-032mediumconceptual
Q3A 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?
Option A. A perpetual fixed-rate loan commencing immediately
Why it is wrong: This changes both start date and structure rather than matching the future period.
Option B. A spot purchase of a ten-year coupon bond
Why it is wrong: This creates a funded long-term asset rather than the specified forward-period rate agreement.
Option C. A forward rate agreement — Correct answer
Option D. A series of annual equity dividend swaps
Why it is wrong: The reference cash flows would not match the stated interest-rate borrowing exposure.
Answer: C. 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, shown before you answer in practice mode: Common mistake: Assuming an FRA itself supplies the funds needed for the borrowing.
IV-033mediumconceptual
Q4A 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?
Option A. Receives ₹1,50,000
Why it is wrong: This reverses the direction for the fixed-rate payer.
Option B. Pays ₹17,50,000
Why it is wrong: This counts the fixed leg without offsetting the floating receipt.
Option C. Pays ₹6,00,000
Why it is wrong: This applies the annual difference for an entire year.
Option D. Pays ₹1,50,000 — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Confusing the gross fixed payment with the net swap settlement.
IV-034mediumnumerical
Q5A 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?
Option A. Pay floating and receive fixed in a swap
Why it is wrong: That adds floating-rate payment exposure rather than offsetting it.
Option B. Buy an interest-rate cap struck at 8% — Correct answer
Option C. Sell an interest-rate cap struck at 8%
Why it is wrong: Selling the cap creates a payment obligation precisely when rates rise.
Option D. Buy an interest-rate floor struck at 8%
Why it is wrong: A floor pays when rates fall, which is not the borrower’s stated adverse direction.
Answer: B. A cap consists of caplets paying when the reference rate exceeds the strike. 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, shown before you answer in practice mode: Common mistake: Confusing a rate cap with a put option on the rate itself.
IV-035mediumnumerical
Q6An 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?
Option A. Treat an email from the outgoing party alone as automatically releasing every obligation
Why it is wrong: A unilateral message does not meet the stated tripartite and consent requirements.
Option B. Change the user’s fixed rate at the same time without agreement
Why it is wrong: Novation is not permission to rewrite the remaining party’s economic terms unilaterally.
Option C. Transfer the contract secretly without informing the remaining party
Why it is wrong: The framework requires prior consent, not merely subsequent notification.
Option D. Obtain the remaining party’s prior consent and replace the contract through a tripartite agreement — Correct answer
Answer: D. 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, shown before you answer in practice mode: Common mistake: Using the word novation without checking whose consent and documentation are needed.
IV-036hardregulatory
Q7A 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 A. An unchanged bond price with automatic doubling of the fixed coupon
Why it is wrong: The assumed fixed coupon does not double without a contractual change.
Option B. A fall in required bond yield that raises the bond price — Correct answer
Option C. A higher yield regardless of what happens to bond price
Why it is wrong: A price-underlying call is not a call directly on the yield.
Option D. A rise in required yield that lowers the bond price
Why it is wrong: This typically moves a bond-price call against its buyer.
Answer: B. Option direction must be identified from the stated underlying. A call on bond price gains intrinsic value 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, shown before you answer in practice mode: Common mistake: Treating every interest-rate call as a bet on rising yields.
IV-037mediumconceptual
Q8Two 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?
Option A. Yes. An electronic trade record replaces the need for written contract terms
Why it is wrong: Electronic records still require defined contractual rights and obligations.
Option B. No. OTC transactions can also take place on electronic trading platforms — Correct answer
Option C. Yes. Any contract matched electronically becomes an exchange-traded future
Why it is wrong: Electronic execution does not determine the contract’s legal form.
Option D. No. Interest-rate swaps can only be agreed by telephone between dealers
Why it is wrong: OTC trading can be electronic, voice-based or otherwise permitted.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Assuming an electronic screen necessarily implies exchange rules and CCP clearing.
IV-038mediumregulatory
Q9Why can standardised contract sizes and expiry dates support liquidity in exchange-traded interest-rate futures?
Option A. They concentrate trading interest in fungible contracts — Correct answer
Option B. They make price discovery unnecessary
Why it is wrong: Common contracts support price discovery rather than remove its function.
Option C. They eliminate all bid–ask spreads by law
Why it is wrong: Standardised contracts can still have spreads and limited depth.
Option D. They ensure every user’s cash-flow dates and amounts match exactly
Why it is wrong: Standardisation can create a mismatch for an individual hedger.
Answer: A. 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, shown before you answer in practice mode: Common mistake: Assuming the most liquid standard contract is automatically an exact hedge.
IV-039mediumconceptual
Q10A 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?
Option A. Exchange the full notional principal with the seller as soon as the swaption is bought
Why it is wrong: A swaption premium is not the same as funding the swap notional.
Option B. Pay the agreed option premium. Entering the swap remains optional under its terms — Correct answer
Option C. Guarantee to the seller that floating rates will stay above the fixed rate
Why it is wrong: No participant can guarantee future market rates through buying an option.
Option D. Enter the pay-fixed swap in six months, even if market rates make it unfavourable
Why it is wrong: That would describe a binding forward-starting swap rather than a purchased option.
Answer: B. 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, shown before you answer in practice mode: Common mistake: Assuming every future-dated interest-rate contract is already an unconditional swap.
IV-040mediumconceptual
Interest Rate Derivatives: common questions
How many practice questions are there on Interest Rate Derivatives?
10 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 10 practice topics for NISM Series IV, which has 150 questions in total.
Are these real NISM Series IV questions on Interest Rate Derivatives?
No. LearnNifty wrote every question from NISM's public syllabus. NISM does not publish its question bank, so nobody can offer you the real paper. Use these questions to check that an idea has gone in. Use the official NISM workbook to see what is examined.
Does negative marking apply to NISM Series IV?
Yes. NISM takes off 25% of a question's marks for a wrong answer. On a 1-mark question that is 0.25 marks off. A blank question earns nothing and loses nothing, so a wrong guess costs marks on this paper. Timed practice here uses the same rule.
Are these practice questions kept up to date?
Each question is written against the rules printed on this page, last checked on 5 September 2026. A Budget or a SEBI circular can change a rate, a lot size or an expiry day. If one of those rules changes before your exam, treat the questions that use it as out of date. Then check NISM's current workbook.
Exchange Traded Interest Rate Futures
20 questions on Exchange Traded Interest Rate Futures. Its quiz opens on that unit.
Open Exchange Traded Interest Rate Futures