Interest rate options - Fixed income

''S10 says most interest rate options are written on future contracts rather than on debt securities" But as per my understanding, interest rate options are written on a reference interest rate like LIBOR. e.g interst rate calls and puts. Although payoff of option written on bond future will finally be deternmined by interest rate movement, but direction will be different. e.g. a put on interest rates will have positive payoff when interest rate decline. But a put on bond future will have positive payoff when bond value decline (interest rates are up). So when a FI question talks about hedging using a interest rate option, is it option on future or option on intt rate? thanks

Hi, im going to try to give my 0.02: so lets say you have an option on interest rates, underlying is libor - how do you deliver libor at settlement? deliver bond w/ coupon libor+spread - expensive or deliver bond future w/ coupon libor + spread - cheap i guess you can make a decision on which to use, but since the CFA has been talking about using futures to hedge throughout the entire curriculum, im thinking theyre lookin for futures. all, Best of luck

> So when a FI question talks about hedging using a > interest rate option, is it option on future or > option on intt rate? > thanks options on futures since they are very liquid and are traded in xchange. See this for one example. http://www.cmegroup.com/trading/interest-rates/us-treasury/30-year-us-treasury-bond_quotes_globex_options.html?exchange=XCBT&foi=OPT&venue=G&productCd=ZBM0&underlyingContract=ZB&floorContractCd=17M0&expMonth=201006