Interest Rate Future

See: Interest Rate. See: Futures. See: Interest Rate Option.

You know that, three years from now, you're going to need to borrow a ton of money to build that damn dam. So you buy an interest rate future, paying 35 basis points on the total of $400 million you'll borrow to lock in today's rates of 3.5%. If rates are the same or go down three years from now, you've wasted the 35 basis points...so think of them like "loan term life insurance."

Why would you even do this? Well, if rates went up to, say, 6%, then your country couldn't build the damn dam at all; the interest would be so expensive you just couldn't afford it. So in paying the vig up front, you guarantee affordability, predictability, and well...jobs for the people who vote for you.