Taxmann's Interest Rate Derivatives - Book By NISM

Edition : March 2026 (WorkBook Version)

nterest Rate Derivatives is a practical guide to exchange-traded interest rate futures and options in India. It starts with how interest rates are set and how bonds are priced and measured for risk. It then explains how interest rate futures and options are designed, priced and used for hedging, trading and arbitrage. The later chapters cover how these contracts are traded, cleared and settled on Indian exchanges, and the regulatory, accounting, tax and investor protection framework around them.

The book is written for use, not just reading. Each idea is worked through with numbers, tables or charts, and tied to how the Indian market actually operates.

This book is intended for the following audience:

• Dealers, Sales Staff and Approved Users at trading members who handle interest rate futures and options
• Treasury and Fixed Income Professionals at banks, primary dealers, mutual funds, insurance companies and NBFCs who manage interest rate risk
• Corporate Finance and Treasury Teams that borrow or invest and want to hedge against rate moves
• Risk, Operations and Compliance Staff at brokers and clearing members
• Investors and Traders who want to understand interest rate futures and options before they trade
• Students and Early-Career Professionals in banking, finance and the capital markets

The Present Publication is the March 2026 Workbook Version, developed in collaboration with the Certification Team of NISM and Mr A.C. Reddi & Mr Sunil M. Gawde. It is published exclusively by Taxmann, with the following noteworthy features:

• [Bond Maths Worked in Full] Bonds are priced with discount-factor tables and valued coupon by coupon between coupon dates. Duration is worked out in a spreadsheet-style table. A shock table shows where duration alone goes wrong, and convexity closes the gap
• [Examples on Real Government Securities] Examples use actual G-Secs such as 7.17% GS 2028, 5.79% GS 2030, 6.10% GOI 2031 and 6.45% GOI 2029. The yield curve charts are drawn from G-Sec yields
• [A Pay-off Table and Chart for Each Position] Long and short futures, calls and puts, and 11 option strategies are each set out price by price in a table and plotted on a chart. Most cases also show the break-even points and the maximum profit and loss
• [Pricing, Step by Step] A bond futures price is built up from the cash price, the financing cost and the income on the cash position. T-bill futures are priced from forward rates. Each option Greek comes with a worked example. The binomial, Black-Scholes and Black (1976) models are explained
• [Hedging and Arbitrage Cases in Rupee Terms] Cases include:
• A bondholder's short hedge, set against two other choices
• A duration-based hedge for a G-Sec portfolio, with the number of lots worked out
• A company hedging a planned NCD issue
• An insurer's long hedge for expected premiums
• Regular and reverse arbitrage, each tested at two expiry prices
• [Contract Specifications at a Glance] Specifications are set out contract by contract for:
• Cash-settled bond futures on 6-, 10- and 13-year GOI securities
• 91-day T-bill futures
• Overnight MIBOR futures
• Corporate bond index futures
• GOI bond options
• Worked examples then show lot size, tick size and contract value for the futures
• [Trading, Clearing and Margins Illustrated] Sample order books, a spread order book and order-matching walk-throughs show how orders meet. A member-wise build-up of positions, position limits worked out for two exchanges, a day-by-day mark-to-market schedule and margin parameter tables show what happens after the trade
• [Everyday Analogies] Hard ideas start from familiar situations:
• A loan between two people, for interest
• A wheat farmer and a miller, for forwards
• A land deal, for a call option
• Car insurance, for a put option
• [Concepts Drawn, Not Just Described] Charts and diagrams show yield curve shapes, price-yield curves, pull to par, the saw-tooth effect of accrued interest, convexity, novation, clearing member structures and interoperability between clearing corporations
• [Assumptions and Limits Spelt Out] The book states what its models leave out:
• The drawbacks of YTM
• The error in duration estimates
• The assumptions behind cost-of-carry and Black-Scholes pricing
• The limits of the put-call ratio
• The basis risk in real hedges
• Worked examples also note the costs they ignore, such as brokerage, taxes and funding costs
• [Side-by-side Comparisons] Tables compare FRAs with interest rate futures, and exchange-traded with OTC interest rate options. Others set out the four types of IRD underlying, the four generic derivatives across asset classes, and how each pricing factor moves call and put premiums
• [Source-backed and Updated] 84 footnotes give definitions, circular references (many with web links) and pointers to related sections. The March 2026 version reflects recent changes, such as:
• The SEBI (Stock Brokers) Regulations 2026
• RBI's 2025 directions on bond forwards and on NDS-OM access for stock brokers
• SEBI's 2025 framework for retail algo trading
• SCORES 2.0 and SMART ODR

The coverage of the book is as follows:

• Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Market
• What moves interest rates, and effective, nominal and real rates
• Types of fixed income securities by issuer, maturity, coupon, embedded option, security and seniority
• Other instruments, such as AT1 and Tier 2 bonds, convertibles, REITs and InvITs, and green, ESG and masala bonds
• Credit, price and reinvestment risk, the risk-free rate and credit spreads
• Yield curve shapes and shifts, day-count conventions, accrued interest, and clean and dirty prices
• Spot rates, current yield, YTM, money market yields and effective yield
• Bond valuation, including pricing between coupon dates and off spot rates, the price-yield relationship and pull to par
• Macaulay and modified duration, portfolio duration, PV01 and convexity
• The G-Sec market: auctions and trading platforms (NDS-OM, RBI Retail Direct, stock exchanges), switches, OMOs, buybacks and securities lending
• The corporate bond market: issuance through the EBP, and trading on RFQ and online bond platforms
• The money market, from call money and TREPS to T-bills, CPs and CDs, and Overnight MIBOR
• Regulators and credit rating agencies
• Interest Rate Derivatives
• What makes a contract a derivative, and the economic role derivatives play
• Four approaches to risk: speculation, hedging, insurance and diversification
• Forwards (FRAs and bond forwards), futures, and options (caps, floors and collars)
• Swaps (with an Overnight MIBOR swap worked day by day), swaptions and credit default swaps
• Growth drivers and global market data from the BIS
• Hedgers, speculators and arbitragers, the four types of underlying, and OTC versus exchange-traded markets
• Exchange Traded Interest Rate Futures
• Features and terms, from contract cycle and tick size to daily and final settlement prices, open interest and rollover
• How interest rate futures have evolved in India since 2003
• Long and short pay-offs, contract specifications, and lot size, tick size and contract value
• The case for exchange-traded products, and how futures compare with FRAs
• Pricing through forward rates, cost of carry and basis, the expectancy model, convergence at expiry and T-bill futures pricing
• Exchange Traded Interest Rate Options
• Option terms, futures versus options, European, American and Bermudan styles, and moneyness
• Intrinsic and time value, and the five factors that drive premiums
• The Greeks and put-call parity
• Binomial, Black-Scholes and Black (1976) pricing, and historical, forecast and implied volatility
• Pay-offs of long and short calls and puts, and squaring off before expiry
• Contract specifications and a comparison with OTC options
• Open interest and the put-call ratio as market indicators
• Strategies using Exchange Traded Interest Rate Derivatives
• Choosing the instrument, market side and contract month for a hedge or trade
• Short, long, portfolio and future-borrowing hedges, and options as hedges
• Vertical, horizontal and diagonal spreads, straddles, strangles, covered call, protective put and long call butterfly
• View-based trading with and without leverage, and changing portfolio duration
• Regular and reverse arbitrage, and synthetic securities for yield enhancement
• Calendar and inter-bond spreads, and the limits of these products for hedgers
• Trading Mechanism in Exchange Traded Interest Rate Derivatives
• The entities in the trading system, from exchanges and clearing corporations to members, authorised persons and clients
• The trader workstation and ways to place orders, including internet trading, DMA and algorithmic trading
• Order books, spread order books and price-time matching
• Order types and conditions, order modification, trade execution, client code changes and trade annulment
• Broker risk controls, pre-order and pre-trade checks, technology safeguards and surveillance
• Price bands and trading costs, including brokerage limits, SEBI fees and stamp duty
• Clearing, Settlement and Risk Management in Exchange Traded Interest Rate Derivatives
• Clearing corporations, the three kinds of clearing member, clearing banks and depositories
• Interoperability among clearing corporations
• Working out open positions, settlement obligations and position limits
• Daily mark-to-market, premium, final and funds settlement, and client running accounts
• Physical delivery: deliverable securities, conversion factor, invoice price and the cheapest-to-deliver bond
• SPAN-based margins, extreme loss margin, calendar spread charges, liquid assets and haircuts, and risk reduction mode
• Margin collection and protection of client collateral, from margin pledges to client-level segregation
• The Core Settlement Guarantee Fund, its default waterfall, and stress and back testing
• Regulatory Framework for Exchange Traded Interest Rate Derivatives
• The regulators and laws involved, the SC(R)A and the RBI-SEBI Standing Technical Committee
• RBI's Rupee Interest Rate Derivatives Directions, 2019 and the 2025 draft, and SEBI's main regulations
• How banks, primary dealers, mutual funds, insurers, FPIs and NBFCs can take part
• The roles of FIMMDA and FBIL
• Membership rules: base minimum capital, and eligibility for individuals, firms, LLPs, companies, banks and primary dealers
• Fit and proper criteria, and authorised persons
• Accounting and Taxation
• The ICAI Guidance Note on derivatives (Revised 2021): fair value, hedge accounting, presentation, disclosures and hedge effectiveness
• AS 30 and Ind AS 109
• Tax treatment of derivative income, and how turnover is computed, with an example
• Tax audit, the presumptive scheme, and set-off and carry forward of losses
• Code of Conduct and Investor Protection Measure
• SEBI's code of conduct for stock brokers
• Grievance redressal through brokers, investor charters, SCORES 2.0, investor service centres and SMART ODR
• Online dispute resolution through conciliation and arbitration, with fee tables
• Handling of broker defaults, and the Investor Protection Fund
• PoA, DDPI and KYC, including e-KYC, KRAs, unique client codes and digital KYC for persons with disabilities
• Risk disclosures and the main risks in these products
• Suspicious transaction reporting and voluntary freezing of trading accounts

The structure of the book is as follows:

• Learning Objectives — Each chapter opens with a boxed list of what the reader will learn
• Numbered Sections — Topics run in numbered sections and sub-sections (for example, 1.12 and 1.12-3), so any point is easy to find
• Examples in Place — Examples, tables, charts and diagrams follow the idea they explain. Short recap lists, such as 'In brief' and 'Important points of Futures', sum up the key points
• Sample Questions — Each chapter ends with five multiple-choice questions in a shaded box, with the correct answer in bold. There are 50 in all