Basic question. Are interest rate options and bond options the same thing? Confused by the reading if they were two different things but assuming they are the same.
Best question ever for level 3. Haha.
Thanks,
They’re not.
The payoff on an interest rate option is the difference between the strike rate and the reference rate, that difference being multiplied by a nominal amount.
The payoff on a bond option is the difference between the strike price and the market price for a given bond.
The primary difference is that the payoff on interest rate options changes linearly as the reference rate changes, whereas the payoff on bond options generally does not change linearly as interest rates (in particular, the bond’s YTM) change.
They are quite similar in their payoffs, however.
Hi.
Interest rate options and bond options are different as their underlyings (i.e., interest rate or bond) are different.
A long position of a bond call option means the right to buy the bond at particular strike price at option’s expiration date. A long position of a interest rate call option means the right to borrow some predetermined notional money at some predetermined interest rate starting at or a few days after option’s expiration date.
Hope this helps.
Fantastic. Thanks. I was confused by the Fixed income reading because they talk about them but I didn’t get if they were the same or different. It seemed to be in the same heading.
Thanks. Much appreciated.