The full form of IROs is Interest rate options

Interest rate options are a type of derivative that is based on the value of interest rates. They are generally tied to interest rate products like Treasury notes. Interest rate options are generally traded on exchanges like the CME Group and are packaged as different types of products.

There are two types of options that can be purchased on the exchanges, calls and puts. Interest rate options are used as a hedge for lenders and borrowers in times of economic uncertainty. When an interest rate option is purchased, like an interest rate call option, the purchaser has a right to pay a fixed rate and receive a variable rate. Interest rate options are also available for purchase over the counter and can be considered risky depending on the strike price and expiry date of the option purchased.

Institutions can hedge their risk by limiting their downside for the period when they decide to take out a loan or by creating an interest rate collar. In such situations, the lending institution that has purchased the interest rate call option can limit the total rate that they will be taking on and create more accurate financial forecasts.

These types of options differ from traditional options, which are based on an underlying security. Interest rate options are based on actual rates and are subject to actions by the Federal Reserve or other central banks worldwide. As such, a strong understanding of global markets and the macroeconomic factors that affect interest rates is required before investing in these types of options.