A debt portfolio is always exposed to the interest rate risk. Hence, derivatives contracts can be used to reduce or alter the risk profile of the portfolios containing debt instruments. Interest rate derivatives contracts can be exchange traded or privately traded (on the OTC market). Thus, a portfolio manager can sell interest rate futures or buy interest rate ‘put’ options, usually on an exchange, to protect the value of his debt portfolio. he can also buy or sell forward contracts or swaps bilaterally with other market players on OTC market.
In India, interest rate swaps and forward rate agreements were introduced in 1999, though the market for these contracts has not yet fully developed. In 2004, the National Stock Exchange has introduced futures on Interest Rates. Interest rate options are not yet available for trading on exchange.
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