Interest rate option

Financial derivative contract

An interest rate option is a specific financial derivative contract whose value is based on interest rates.^[1] Its value is tied to an underlying interest rate, such as the yield on 10 year treasury notes.

Similar to equity options, there are two types of contracts: calls and puts. A call gives the bearer the right, but not the obligation, to benefit off a rise in interest rates. A put gives the bearer the right, but not the obligation, to profit from a decrease in interest rates.

The exchange of these interest rate derivatives are monitored and facilitated by a central exchange such as those operated by CME Group.

References

^ Antl, Boris. "Management of Interest Rate Risk" (PDF). Retrieved 1 February 2024.

Derivatives market

Derivative (finance)

Options

Terms	Delta neutral Exercise Expiration Moneyness Open interest Pin risk Risk-free interest rate Strike price Synthetic position the Greeks Volatility
Vanillas	American Bond option Call Employee stock option European Fixed income FX Option styles Put Warrants
Exotics	Asian Barrier Basket Binary Callable bull/bear contract Chooser Cliquet Commodore Compound Forward start Interest rate Lookback Mountain range Rainbow Spread Swaption
Strategies	Backspread Box spread Butterfly Calendar spread Collar Condor Covered option Credit spread Debit spread Diagonal spread Fence Intermarket spread Iron butterfly Iron condor Jelly roll Ladder Naked option Straddle Strangle Protective option Ratio spread Risk reversal Vertical spread (Bear, Bull)
Valuation	Bachelier Binomial Black Black–Scholes (equation) Finite difference Garman–Kohlhagen Heston Lattices Margrabe Put–call parity MC Simulation Real options Trinomial Vanna–Volga