Interest rate option

{{Short description|Financial derivative contract}}

{{refimprove|date=February 2024}}

An interest rate option is a specific financial derivative contract whose value is based on interest rates.{{cite web |last1=Antl |first1=Boris |title=Management of Interest Rate Risk |url=http://faculty.london.edu/icooper/assets/documents/ManagementInterestRateRisk(1).pdf |access-date=1 February 2024}} Its value is tied to an underlying interest rate, such as the yield on 10 year treasury notes.

Similar to equity options, there are two types of contracts: calls and puts. A call gives the bearer the right, but not the obligation, to benefit off a rise in interest rates. A put gives the bearer the right, but not the obligation, to profit from a decrease in interest rates.

The exchange of these interest rate derivatives are monitored and facilitated by a central exchange such as those operated by CME Group.