Exchange Traded Interest Rate Futures

Chapter 3: Exchange Traded Interest Rate Futures

NISM Series IV — Interest Rate Derivatives | ~20% weightage | ~80 questions

What this chapter is about

The most operational chapter. Two products: 91-day T-bill futures and 10-year G-Sec bond futures. Know every contract specification cold: lot size, tick size, expiry day, settlement method, price quotation, operating range, contract months. The exam tests every number in this chapter. The "100 ticks = Rs 500 change" calculation appears repeatedly.

Two IRD products on Indian exchanges

| Feature | 91-Day T-Bill Futures | G-Sec Bond Futures (10Y) | |---------|----------------------|--------------------------| | Underlying | 91-day Treasury Bill | 10-year G-Sec (notional) | | Underlying type | Actual T-bill | Notional bond | | Lot size (face value) | Rs 2 lakhs | Rs 2 lakhs | | Tick size | Rs 0.0025 | Rs 0.0025 | | Price quotation | 100 minus discount yield | Price per Rs 100 face value | | Settlement | Cash | Cash (current) or Physical (single bond) | | Last trading day | Last Wednesday of expiry month | Last Thursday of expiry month | | Settlement day | Next working day after last trading day | Next working day after last trading day | | Operating range | ±5% of base rate (MIBOR) | Specified % |

Contract amount (market lot) = Rs 2,00,000 face value for BOTH T-bills and G-Sec futures

T-bill futures — unique features

Price quotation: 100 minus discount yield

• If yield = 5%, quoted price = 95.00
• If yield = 6%, quoted price = 94.00
• Lower price = higher yield

Last trading day: Last Wednesday of expiry month (T-bills) If that Wednesday is a holiday → previous trading day

Settlement: Cash settled. Final settlement price = weighted average price of T-bill in RBI auction on expiry day.

Contract months: Three nearest serial months + Three nearest quarterly months = 6 contracts available at any time

G-Sec Bond Futures — key specifications

Underlying: Notional coupon-bearing G-Sec

• For 6-year cash-settled: residual maturity between 4 and 8 years on expiry
• For 10-year: residual maturity approximately 8-11 years
• Currently listed: 10-year bond futures

Price quotation: Price per Rs 100 face value

• Bond at Rs 113 → market value = (113/100) × 2,00,000 = Rs 2,26,000
• Bond at Rs 111.75 → market value = 111.75 × 2000 = Rs 2,23,500 (2000 = 2,00,000/100)

Last trading day: Last Thursday of expiry month If Thursday is a holiday → previous trading day

Settlement: Currently cash-settled. Can be physical (for single bond futures).

Cash-settled closing price: Weighted average price of last 30 minutes of trading across all exchanges.

G-Sec maturities currently permitted for cash-settled IRF: 6 years, 10 years, 13 years

Contract months for G-Sec futures: Three serial months + Three quarterly (Mar/Jun/Sep/Dec) = 6 contracts

Quarterly months: March, June, September, December

Tick calculations — the most repeated numerical

Tick size = Rs 0.0025

For one contract (face value = Rs 2,00,000):

Value of 1 tick = 2,00,000 × 0.0025 / 100 = Rs 5

100 ticks change = 100 × Rs 5 = Rs 500 per contract

500 ticks change = 500 × Rs 5 = Rs 2,500 per contract

This Rs 500 per 100 ticks is tested in almost every exam.

Permissible trade quantities

G-Sec futures can only be traded in MULTIPLES of Rs 2 lakhs face value:

• Rs 2L ✅, Rs 4L ✅, Rs 6L ✅, Rs 8L ✅, Rs 10L ✅
• Rs 1L ❌, Rs 3L ❌, Rs 5L ❌ (not multiples of 2L)

Exam question: "Which quantity can be bought?" → Rs 6 lakhs, Rs 8 lakhs (multiples of 2L). NOT Rs 1L, Rs 5L, Rs 15L.

Futures price calculation

T-bill futures price = based on underlying T-bill price + cost of carry (forward rate) Both the underlying price and the forward rate are used.

G-Sec bond futures price = Cash price + Financing cost − Income on cash position

Futures price = Spot price + (Spot × repo rate × days/360) − Accrued coupon income

Speculating on timing of interest rate changes

If you expect 3-month rates to RISE in 1 month:

• Bond prices will fall when rates rise
• Buy a contract expiring in 1 MONTH on underlying sensitive to 3-MONTH rates
• Wait, that's wrong: you SELL (short) to profit from falling bond prices
• Correct: Sell contract expiring in 1 month on underlying sensitive to 3-month rates

Key rule: Match the EXPIRY DATE to when you expect the rate change. Match the UNDERLYING TENOR to which rate you're targeting.

If expecting rate change in short term: Use T-bill futures (short expiry) If expecting rate change in long term: Use G-Sec bond futures (long expiry)

Interest rates and bond prices — the fundamental relationship

Rate rises → Bond price FALLS → Short futures makes profit Rate falls → Bond price RISES → Long futures makes profit

If you expect rates to RISE: SELL G-Sec bond futures (short) If you expect rates to FALL: BUY G-Sec bond futures (long)

Single Bond Futures vs Notional Bond Futures

Notional bond futures: Underlying is a theoretical/hypothetical bond (not a specific actual bond). Current cash-settled IRF in India are notional.

Single bond futures: Underlying is a specific actual government bond. Can be physically settled.

Overnight MIBOR Futures

Underlying: FBIL Overnight MIBOR (Mumbai Inter-Bank Offered Rate) Operating range: ±5% of base rate Example: Base = 5.00, range = 5.00 ± 0.25 = 4.75 to 5.25

Trap Alert

Trap 1: "T-bill futures and bond futures have same last trading day" — FALSE T-bills = Last Wednesday | G-Sec bonds = Last Thursday

Trap 2: "T-bill futures contract size is different from G-Sec futures" — FALSE Both = Rs 2 lakhs face value

Trap 3: "T-bill futures are physically settled" — FALSE T-bill futures = always CASH SETTLED

Trap 4: "Bond futures are always cash settled" — DEPENDS Cash-settled: current notional bond futures | Can be physical: single bond futures

Trap 5: "Rs 5 lakh can be traded in G-Sec futures" — FALSE Only multiples of Rs 2L: Rs 5L is NOT a multiple. Rs 6L, Rs 8L are valid.

Trap 6: "Operating range for overnight MIBOR futures = 3%" — FALSE It's ±5% of base rate.

Trap 7: "6Y, 10Y, 13Y refers to current maturities of securities" — partially These are the permitted maturities for cash-settled IRF contracts per SEBI.

Must-remember rules

• Lot size (both T-bill and G-Sec) = Rs 2 lakhs face value
• Tick size = Rs 0.0025 | 1 tick value = Rs 5 per contract
• 100 ticks = Rs 500 per contract (most tested)
• T-bill price: 100 minus discount yield | Bond price: per Rs 100 face value
• T-bill expiry: Last Wednesday | Bond expiry: Last Thursday
• If holiday: previous trading day (NOT next)
• T-bill settlement: cash | Bond settlement: cash (notional) or physical (single bond)
• Settlement day: next working day after last trading day
• Quarterly months: March, June, September, December
• 6 contract months available: 3 serial + 3 quarterly
• Rate rises → bond price falls | Rate falls → bond price rises
• Sell futures = profit from rising rates / falling bond prices
• Buy futures = profit from falling rates / rising bond prices
• MIBOR futures operating range = ±5% of base rate
• Permitted G-Sec maturities for cash-settled IRF: 6Y, 10Y, 13Y

Quick revision — 60 second scan

• Both T-bill and bond futures: lot = Rs 2 lakhs | tick = 0.0025 | 1 tick = Rs 5
• 100 ticks = Rs 500 per contract
• T-bill: 100 minus yield | Bond: price per Rs 100
• T-bill expiry: Last Wednesday | Bond expiry: Last Thursday | Both: previous day if holiday
• T-bill = cash settlement | Bond = can be physical (single) or cash (notional)
• 6 contracts: 3 serial + 3 quarterly (Mar/Jun/Sep/Dec)
• Rate up → bond price down → sell futures | Rate down → bond price up → buy futures
• Trade in multiples of Rs 2 lakhs only