Interest rate options give the buyer the right to:

• A. Grants buyer the right to deal in IRF; exchange traded; payable premium; all benefits of IRF
• B. An option to borrow at a fixed rate
• C. A currency swap
• D. A government bond

Answer: (A)

Interest rate options are options on interest rate futures. They give the buyer the right, not the obligation, to enter into an interest rate futures contract at a predetermined price, and this right is purchased by paying a premium. Because these options are traded on an exchange, they enable the holder to participate in the movements of interest rates through the futures market without having to commit to a futures position upfront. If rates move in the buyer’s favor, exercising the option lets them deal in the IRF and benefit from that movement; if not, the option may expire worthless and only the premium is lost. The alternative choices describe other types of financial arrangements (borrowing at a fixed rate, a currency swap, or a government bond) that are not options on interest rate futures.