NISM-Series-IV: Interest Rate Derivatives Certification Examination

Test Objectives

Unit 1: Fixed-income or Debt Securities

1.1 Know about fixed-income securities and the economic role of debt markets

1.2 Know the classification of fixed-income securities based on cash flow pattern, tenor, etc.

1.3 Understand the difference between fixed-income security and fixed-return security

1.4 Differentiate between debt securities and equity securities, debt market and equity market as components of capital market

1.5 Explain the importance of debt market for the economic development of a country and know the relative size of debt and equity markets globally and in India

1.6 Know the primary and secondary markets for debt securities in India

Unit 2: Interest Rate – Introduction

2.1 Understand the concept of interest rate

2.2 Explain the importance of risk-free interest rate and differentiate between risk-free interest rate and risky interest rate

2.3 Understand term structure of interest rates (yield curve), its shape, shifts and interpretation

2.4 Understand the conversion of interest rate into interest amount: effect of payment frequency, compounding frequency, day count basis and business day adjustment

2.5 Explain the concept of accrued interest

Unit 3: Return and Risk Measures for Debt Securities

3.1 Define spot rate (or zero rate) and holding period return

3.2 Define and calculate various measures of return: coupon, current yield, yield-to-maturity

3.3 Describe the relation between spot rate, bond price and yield-to-maturity

3.4 Define and calculate various measures of risk: Macaulay Duration, Modified Duration, Rupee Duration, Price value of a basis point (PVBP) and Convexity

Unit 4: Interest Rate Derivatives

4.1 Define derivatives and discuss economic role of derivatives

4.2 Distinguish between bond derivatives and interest rate derivatives with specific reference to features and risks addressed by them

4.3 Differentiate between features of Over-The-Counter (OTC) and Exchange Traded derivatives

4.4 Timeline of derivatives markets in India

Unit 5: Contract Specification for Interest Rate Derivatives

5.1 Know the underlying assets of permissible interest rate derivative contracts in India

5.2 Know the market lot (contract amount), contract months, expiry dates of exchange traded derivatives contracts

5.3 Understand tick size and its relation to the minimum change in the contract value

5.4 Describe the procedure for determining the daily settlement price and final settlement price

5.5 Discuss the delivery aspects of interest rate derivatives contracts including conversion factor, invoice amount, cheapest-to-deliver bond

Unit 6: Trading, Clearing, Settlement and Risk Management

6.1 Describe in brief the process flow of clearing and settlement

6.2 Understand margining and mark-to-market

6.3 Understand the risk management measures like SPAN, value-at-risk and scenario analysis

6.4 Describe and differentiate the process of cash settlement and physical settlement

6.5 Understand the peculiarities of physical settlement in bond futures

6.6 Understand operational guidelines of exchanges

6.7 List and discuss various order types permissible on the exchanges

Unit 7: Regulations and compliance

7.1 Know the role of various regulators in bond and interest rate derivatives market

7.2 Discuss the restrictions and limits applicable to various categories of market participants

7.3 List the regulatory reporting requirements for RBI-supervised entities

7.4 Understand the role of FIMMDA in fixed income and derivatives markets in India

7.5 Briefly discuss the accounting aspects of interest rate derivatives

Unit 8: Trading and Hedging

8.1 Explain speculative / trading strategies with suitable examples

8.2 Explain Hedging strategies for managing interest rate risk in loans and bond investments

8.3 List and describe various risks associated with futures: basis risk, yield curve spread risk and market liquidity risk


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