Interest rate option
An Interest rate option is a specific financial derivative whose value based is based on interest rates. Its value is tied to an underlying interest rate future, a contract that obligates the two parties to make a specific trade at a future date. For example, the buyer of an interest rate future may agree to purchase a treasury bond at a specified price several months in advance.
The exchange of these are monitored and facilitated by a central exchange such as those operated by CME Group.
Similar to equity options, there are two types: 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 off a decrease in interest rates.
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