Interest – Rate Options Contracts:
Interest rate options contracts are options contracts based on an underlying debt security. Options, unlike futures, give their buyers the right, but not the obligation, to buy the underlying bond at a fixed price before a specific date in the future. Option sellers promise to sell the bonds at a set price anytime until the contract expires. In return for granting this right, the option buyer pays a premium to the option seller. Yield-based calls become more valuable as yields rise, and puts become more valuable as yields decline.
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