What Is Forward Rate Agreement

A futures agreement (FRA) is another name for a futures contract – an over-the-counter agreement that allows the buyer and seller to set the price, interest rate or exchange rate of a subsequent transaction. The party in a long position agrees to borrow $15 million in 90 days (settlement date). Then there will be an interest rate of 2.5% for the remaining 180 days of the contract. The effective description of an advance rate agreement (FRA) is a cash derivative contract with a difference between two parties, which is valued with an interest rate index. This index is usually an interbank interest rate (IBOR) with a specific tone in different currencies, such as libor. B in USD, GBP, EURIBOR in EUR or STIBOR in SEK. An FRA between two counterparties requires a complete fixing of a fixed interest rate, a nominal amount, a selected interest rate indexation and a date. [1] As a guarantee scheme, FRAs are similar to short-term interest rate futures (STIRs). But there are a few distinctions that set them apart.

A company learns that it will have to borrow $1,000,000 in six months for a period of six months. The rate at which it can now afford is the 6-month LIBOR plus 50 basis points. Let`s also assume that the 6-month LIBOR is currently 0.89465%, but the company`s treasurer thinks it could even increase by 1.30% in the coming months. A forward currency account can be made either on a cash or supply basis, provided the option is acceptable to both parties and has been previously defined in the contract. Another important concept in pricing options is related to put-call-forward… One of the most common types of futures is the currency date. By purchasing futures contracts, international companies exposed to currency fluctuations enter into an exchange rate agreement that will be settled at a later date, eliminating the risk of potential exchange rate fluctuations in the interim. Yes, yes. Customers can use FRAs to lock in a fixed interest rate on expected credit risks. Thus, XYZ Corporation has a facility that should roll in three months for a new six-month period. Fearing an increase in interest rates, they want to secure fixed-rate financing for this period. XYZ is now entering a six-month FRA that starts in three months and expires in nine months as a fixed payer.