## What is meant by interest rate derivatives?

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An interest rate derivative is a financial contract whose value is based on some underlying interest rate or interest-bearing asset. These may include interest rate futures, options, swaps, swaptions, and FRA’s.

**Is interest rate swap a derivative?**

An interest rate swap is an agreement between two parties to exchange one stream of interest payments for another, over a set period of time. Swaps are derivative contracts and trade over-the-counter.

### What is an interest rate futures contract?

An interest rate future is a futures contract with an underlying instrument that pays interest. The contract is an agreement between the buyer and seller for the future delivery of any interest-bearing asset.

**How many types of interest rate derivatives are there?**

Interest rate derivatives are often called IRDs and are subclassified into essentially two types: linear and non-linear.

#### What is the difference between a swap and a derivative?

Derivatives are a contract between two or more parties with a value based on an underlying asset. Swaps are a type of derivative with a value based on cash flow, as opposed to a specific asset.

**What is interest rate futures with example?**

An interest rate future is a financial derivative (a futures contract) with an interest-bearing instrument as the underlying asset. It is a particular type of interest rate derivative. Examples include Treasury-bill futures, Treasury-bond futures and Eurodollar futures.

## How do you hedge interest rate futures?

The approach used with futures to hedge interest rates depends on two parallel transactions:

- Borrow/deposit at the market rates.
- Buy and sell futures in such a way that any gain that the profit or loss on the futures deals compensates for the loss or gain on the interest payments.

**How are derivatives priced?**

Derivatives are priced by creating a risk-free combination of the underlying and a derivative, leading to a unique derivative price that eliminates any possibility of arbitrage.