THE Securities & Exchange Board of India (Sebi) plans to allow exchange traded funds (ETFs) based on interest rate futures (IRF) in early 2009, according to TC Nair, whole-time member, Sebi.
This instrument would help banks, financial institutions and FIIs hedge themselves against sharp adverse moves in interest rates. Mr Nair was speaking at an Assocham event. “Sebi would shortly permit FIIs to trade in currency futures once the market gets stabilised,” Mr Nair added. He also said applications for registration of 22- 25 foreign institutional investors (FIIs) was pending with the regulator and would be cleared shortly.
Interest rate futures are typical futures contracts where the holder agrees to take delivery of a given amount of the related debt security at a later date (usually no more than three years). Futures may be in treasury bills and notes, certificates of deposit, commercial paper, or any other interest-bearing certificates.
Interest rate futures are stated as a percentage of the par value of the applicable debt security. The value of interest rate futures contracts is directly tied to interest rates. For example, as interest rates decrease, the value of the contract increases. As the price or quote of the contract goes up, the purchaser of the contract gains, while the seller loses. A change of one basis point in interest rates causes a price change. Those who trade in interest rate futures do not usually take possession of the financial instrument. In essence, the contract is used either to hedge or to speculate on future interest rates and security prices. For example, a pension fund manager might use interest rate futures to hedge the bond portfolio position.
This instrument would help banks, financial institutions and FIIs hedge themselves against sharp adverse moves in interest rates. Mr Nair was speaking at an Assocham event. “Sebi would shortly permit FIIs to trade in currency futures once the market gets stabilised,” Mr Nair added. He also said applications for registration of 22- 25 foreign institutional investors (FIIs) was pending with the regulator and would be cleared shortly.
Interest rate futures are typical futures contracts where the holder agrees to take delivery of a given amount of the related debt security at a later date (usually no more than three years). Futures may be in treasury bills and notes, certificates of deposit, commercial paper, or any other interest-bearing certificates.
Interest rate futures are stated as a percentage of the par value of the applicable debt security. The value of interest rate futures contracts is directly tied to interest rates. For example, as interest rates decrease, the value of the contract increases. As the price or quote of the contract goes up, the purchaser of the contract gains, while the seller loses. A change of one basis point in interest rates causes a price change. Those who trade in interest rate futures do not usually take possession of the financial instrument. In essence, the contract is used either to hedge or to speculate on future interest rates and security prices. For example, a pension fund manager might use interest rate futures to hedge the bond portfolio position.
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