DEFINITION of 'Interest Rate Options'

An investment tool whose payoff depends on the future level of interest rates. Interest rate options are both exchange traded and over-the-counter instruments.

BREAKING DOWN 'Interest Rate Options'

Interest rate options from exchanges in the United States are offered on Treasury bond futures, Treasury note futures and eurodollar futures. An investor taking a long position in interest rate call options believes that interest rates will rise, while an investor taking a position in interest rate put options believes that interest rates will fall.

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RELATED FAQS
  1. What does high open interest tell you about an option?

    Learn about the open interest of options contracts and what a high and a low open interest indicate about the liquidity of ... Read Answer >>
  2. How can an investor reduce interest rate risk?

    Learn about the different ways investors can reduce interest rate risk. Locking in interest rates increases certainty for ... Read Answer >>
  3. What's the difference between a regular option and an exotic option?

    Before learning about exotic options, you should have a fairly good understanding of regular options. Both types of options ... Read Answer >>
  4. What is the difference between open interest and volume?

    Learn more about options, what options' volume and open interest are and the difference between volume and open interest ... Read Answer >>
  5. Does the seller (the writer) of an option determine the details of the option contract?

    The quick answer is yes and no. It all depends on where the option is traded. An option contract is an agreement between ... Read Answer >>
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