A financial instrument (a derivative) whose value is based on the performance of an underlying interest rate. It gives the holder the right to pay or receive a notional principal at a predetermined interest rate. This instrument, with all its different types and variants, is notoriously used to hedge exposures to interest rate movements. Interest rate derivatives, like other derivatives, come in different types such as interest rate swap, interest rate option, interest rate futures, interest rate cap, interest rate floor, etc.