Dr. Shashi Srivastava * Divya Srivastava ** Abstract
In the era of globalization, one of the macro-economic variable that has come into great focus is interest rate. The volatility of interest rates has increased manifold in the last couple of years. Interest rate risk management has become very important and assorted instruments like interest rate derivatives (interest rate swaps, forward rate agreement and interest rate futures) have been developed to deal with such types of risk. Therefore the present paper has been designed to through light on this particular segment with reference to Interest Rate Futures in India. The paper will attempt to throw light upon interest rate futures at global level. It will examine the use of interest rate futures in India. Further, it will focus on the regulatory framework on IRFs laid by RBI. The paper will also analyze the applicability of Interest rate future in Indian economy. For this secondary data has been collected from the website of BIS, RBI, NSE, etc. The time frame used in the paper is from June 2003 to Sep 2003 as IRF was traded in those three months only and from 31 Aug.2009 till 31 Mar.2010. The study investigates the trading activity using volume, change in volume, open interest, change in open interest, open, close, low and settlement price, applicable and annualized volatility. In spite of decrease in the volume traded the market continues to grow at slow pace as new money is flowing in the market. Indian IRF market is dominated by hedgers as the volatility seems to be low. As the investment in GOI securities increases the investment in IRF will also increase.
Key words: Interest Rate Futures, trading activity.
*Asst. Professor, Faculty of Management Studies, Banaras Hindu University , Varanasi **Research Scholar, Faculty of Management Studies, Banaras Hindu University. e- mail id: divyasri_28@rediffmail , Mobile No.9389188362
INTEREST RATE FUTURES IN INDIA
An interest rate is a rate which is charged or paid for the use of money, in return a lender receives for deferring the use of funds, by lending it to the borrower. There exists a risk in an interest-bearing asset, such as a loan or a bond, due to the possibility of a change in the asset's value resulting from the variability of interest rates. The risk that an investment's value will change due to a change in the absolute level of interest rates is often known as interest rate risk. In other words, Interest rate risk is the uncertainty in the movement of the interest rates. Banks, insurance companies, primary dealers and provident funds bear a major portion of the interest rate risk on account of their exposure to government securities. With a large stock of household financial savings on the asset side and an increasing quantum of housing loans on the liabilities side interest rate risk has become increasingly important for the household sector as well. It affects the value of bonds more directly than stocks, and it is a major risk to all bondholders. As interest rates rise, bond prices fall and vice versa. The rationale is that as interest rates increase, the opportunity cost of holding a bond decreases since investors are able to realize greater yields by switching to other investments that reflect the higher interest rate. For example, a 5% bond is worth more if interest rates decrease since the bondholder receives a fixed rate of return relative to the market, which is offering a lower rate of return as a result of the decrease in rates. Interest rates have never been constant in the past and one can easily presume they would not remain constant in the future.
The volatility of interest rates has increased manifold in the last couple of years. The annualized volatility of yield of 10 year benchmark GOI security for the calendar year 2000...