Interest rate options

CFA Level III
#1

I thought I figured it all out. Now I’m confused again. I just re-read reading 29. So what is an interest rate option? Is it an option on a treasury bond? According to reading 29, it is and a call option exhibits positive duration. Therefore when interest rate rises, the option value goes down. Now consider an interest rate cap. Is it an interest rate call option? But it has a positive payoff when interest rate rises. And Schweser Practice Exam 1 morning session Q7 differentiates between interest rate options and treasury bond options. It asks the hedging strategies for declining interest rate with exchange-traded interest rate put options, treasury bond options or treasury bond futures. The answer is long exchange-traded interest rate put options, long treasury bond call options or long treasury bond futures. It looks like interest rate put option will have a payoff when interest rate declines, so it’s certainly not a treasury bond put option, and it looks more like a treasury bond call option.

#2

http://www.cboe.com/Products/InterestRateOptionsSpecs.aspx

#3

you would like Increase in rates for: -Long payer swaption -long int rate call -short int rate put -long cap -sell floor -receive floating /pay fixed in int rate swap you would like Decrease in int rates for: -Long receiver swaption -short int rate call -long int rate put -short cap -long floor -receive fixed /pay floating

#4

If we are using the definition of CBOE for interest rate options, then CFAI volume 4 page 22 5.3.6.1 doesn’t make sense at all. It’s clearly talking about a treasury bond option, right? So I’m guessing there’re two kinds of interest rate options, one is yield-based interest rate option where the strike is on interest rate; the other is bond-price based interest rate option where the strike is on bond price and this is the interest rate option that CFAI is talking about. Does it make sense or I’m completely off the mark?

#5

There is onyl 1 type fo interest rate options, other are options on tresuries… and i dont care what CFAI has to say

#6

comp_sci_kid Wrote: ------------------------------------------------------- > http://www.cboe.com/Products/InterestRateOptionsSp > ecs.aspx Open Interest on all these options, all strikes, just calls = 342 contracts with multiplier = $100 CME Eurodollar options Open Interest on all these options, all strikes, just calls = 11,102,382 contracts with multiplier = $2500 Which of these is the real interest rate option and which is the one for kids?

#7

pffffff, Stupid rabbit, eurodollar options are for kids!

#8

any else get pissed at the day conventions on these in Schweser, particularly the lack of consistency with these and swaps etc.

#9

I was curious about that question. How liquid is the market for options on Treasury securities?