An Interest rate option is a specific

financial derivative In finance, a derivative is a contract that ''derives'' its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying". Derivatives can be u ...

contract whose value is based on interest rates. Its value is tied to an underlying

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the 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.

See also