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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