Exchange traded options - part 1

In this lesson

1. 0:00 Exchange traded interest rate options overview
2. 1:09 Understanding options terminology and mechanics
3. 2:29 Options on interest rate futures explained
4. 3:38 Reading exchange traded options tables
5. 5:01 Strike prices and interest rate implications
6. 5:25 Call and put premium patterns analysed
7. 6:22 Premium changes across contract months

About this lesson

You'll discover the key terminology (calls and puts), understand how to interpret options tables with premiums and strike prices, and explore why these products work in the opposite direction to standard interest rate options because they're based on interest rate futures. This foundational knowledge is essential for FM and AFM papers, where exchange traded options frequently appear in hedging scenarios. The video starts by clarifying what options actually do: they give you the right (but not the obligation) to buy or sell, protecting you from downside risk whilst letting you benefit from favourable moves—though this protection comes at a premium cost. You'll learn that exchange traded options come in standardised contract sizes (typically $500,000) and are available on set quarterly dates, making them predictable to work with. The critical insight here is understanding the twist: because these options are based on interest rate futures (which are priced at 100 minus interest rates), borrowers buy puts and savers buy calls—the opposite of how standard options work. The lesson then walks you through reading an options table, showing you how premiums are quoted as annual percentages (even for three-month contracts), how strike prices relate to implied interest rates, and why premium values move the way they do. You'll see that call premiums decrease as strike prices rise (because buying at a lower price is more valuable), put premiums increase as strike prices rise (because selling at a higher price is more valuable), and all premiums increase over longer time horizons due to greater interest rate risk. These patterns are your key to understanding which option to choose in any given scenario.

Duration: 7m