Unit study guide · NISM Series V-D
Exchange Traded Interest Rate Options
6 questions in this unit
What this unit covers
- An option on an interest-rate futures contract is specified to be European-style. When may its holder exercise the option, subject to the contract’s exercise procedures?
- A put option is written on a bond-price quote. Its strike is 102, the underlying price is 99 and its premium is 4 quote points. Using intrinsic value = max(strike − underlying price, 0), what is the option’s time value? Assumptions: All quotes and the option’s price-based underlying are explicitly supplied.
- A trader buys two European calls on a hypothetical interest-rate futures price, each with strike 100 and premium 1.20 quote points. Each quote point is worth ₹1,000 per option contract. The underlying futures final price is 103. Ignoring costs and interest on the premium, what is the total net profit? Assumptions: The multiplier and settlement prices are hypothetical. Premium financing and charges are ignored.
- Which statement correctly distinguishes a purchased option from a futures position?
- An interest-rate option is priced at 1.10 quote points. Its local vega is 0.15 quote points for each one-percentage-point increase in implied volatility. Implied volatility rises from 18% to 20%, while other inputs remain unchanged. Using this first-order approximation, what is the new option value? Assumptions: Vega is supplied per one percentage point, and the calculation is a local first-order estimate.
- An analyst takes an observed interest-rate option premium and solves a selected pricing model for the volatility input that reproduces that premium. What has the analyst estimated?
Key ideas
From the practice bank · 1
An option on an interest-rate futures contract is specified to be European-style. When may its holder exercise the option, subject to the contract’s exercise procedures?
A European-style option can be exercised only at its specified expiry exercise time. This is distinct from whether the option may be sold in the market before expiry. Remember: Do not confuse the ability to trade an option with the right to exercise it.
Hint Exercise style refers to the permitted exercise time.
V-D-139From the practice bank · 2
A put option is written on a bond-price quote. Its strike is 102, the underlying price is 99 and its premium is 4 quote points. Using intrinsic value = max(strike − underlying price, 0), what is the option’s time value? Assumptions: All quotes and the option’s price-based underlying are explicitly supplied.
Intrinsic value = max(102 − 99, 0) = 3 points. Time value = 4 − 3 = 1 point. The premium contains both components. Remember: and intrinsic value are different quantities.
Hint First calculate intrinsic value, then subtract it from the premium.
V-D-140From the practice bank · 3
A trader buys two European calls on a hypothetical interest-rate futures price, each with strike 100 and premium 1.20 quote points. Each quote point is worth ₹1,000 per option contract. The underlying futures final price is 103. Ignoring costs and interest on the premium, what is the total net profit? Assumptions: The multiplier and settlement prices are hypothetical. Premium financing and charges are ignored.
Each call pays max(103 − 100, 0) = 3 points and cost 1.20 points. Net profit = (3 − 1.20) × ₹1,000 × 2 = ₹3,600. Remember: Expiry payoff excludes premium. Trading profit includes it.
Hint Deduct the premium from the positive call payoff before applying the multiplier and contract count.
V-D-141From the practice bank · 4
Which statement correctly distinguishes a purchased option from a futures position?
A purchased option gives its holder the contractual right specified by the option. Futures create obligations for both sides, while the option writer bears the obligations associated with a valid exercise or settlement. Remember: Rights, obligations and premium payments distinguish options from futures.
Hint Compare a right purchased through a premium with a two-sided future commitment.
V-D-142From the practice bank · 5
An interest-rate option is priced at 1.10 quote points. Its local vega is 0.15 quote points for each one-percentage-point increase in implied volatility. Implied volatility rises from 18% to 20%, while other inputs remain unchanged. Using this first-order approximation, what is the new option value? Assumptions: Vega is supplied per one percentage point, and the calculation is a local first-order estimate.
Estimated increase = 0.15 × (20 − 18) = 0.30 points. The approximate new value is 1.10 + 0.30 = 1.40 points. Higher-order effects are excluded. Remember: A Greek’s units determine how to scale the change in its input.
Hint The volatility move is two percentage points under the supplied convention.
V-D-143From the practice bank · 6
An analyst takes an observed interest-rate option premium and solves a selected pricing model for the volatility input that reproduces that premium. What has the analyst estimated?
is the volatility input that makes the chosen model match the observed premium, given the remaining inputs. It may differ from both past realised volatility and the volatility that later occurs. Remember: Implied volatility is a price-derived, model-dependent estimate, not a promised outcome.
Hint The unknown being solved for is the model’s volatility parameter.
V-D-144Vega measures how much an option's theoretical price changes when implied volatility changes.
Read moreIV full form is implied volatility.
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