NISM Series IV : Interest Rate Derivatives Certification Examination

Syllabus for Interest Rate Derivatives Certification Exam

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