Interest Rate Futures (IRF) are:

• A. A private, over-the-counter agreement with no standard size
• B. Similar to FRA, but traded on an exchange and settled by cash differences
• C. A type of commodity futures contract
• D. A loan agreement with variable rates

Answer: (B)

Interest rate futures are standardized, exchange-traded contracts that let you hedge or speculate on movements in short-term interest rates. They have fixed contract sizes and maturity dates, and they are settled in cash, with gains or losses determined by the daily mark-to-market of the contract. This daily cash settlement, or variation margin, keeps the contract’s value liquid without delivering an actual loan or debt instrument. They’re similar to forward rate agreements in that both aim to manage rate exposure, but the key difference is that these futures trade on an exchange and settle by cash differences rather than through a bilateral, one-off settlement tied to a start date. They are not tied to physical commodities, and they are not loan agreements with variable rates.