What Is Fra Forward Rate Agreement

For example, XYZ Corporation, which borrowed money on a variable interest basis, estimates that interest rates are likely to rise. XYZ chooses to pay all or part of the remaining term of the loan with an FRA (or a series of FRAs (see interest rate swaps), while its underlying borrowing remains variable but covered. 2×6 – An FRA with a waiting period of 2 months and a contract term of 4 months. FRA is indicated with the FRA course. For example, if a U.S. dollar FRA is listed at 1.50% and a future borrower expects the 6-month libor rate to be above 1.50% in two months, they should buy an FRA. FRAs can be used by borrowers who want or need to change their interest rate or cash flow profile to meet their specific needs. FRAs are used by borrowers who wish to protect themselves from future interest rate movements or use them. The buyer of an appointment contract enters into the contract to protect against a future rise in interest rates. On the other hand, the seller enters into the contract to protect himself from a future interest rate cut. For example, a German bank and a French bank could enter into a semi-annual term rate contract, under which the German bank would pay a fixed interest rate of 4.2% and receive the variable principal rate of 700 million euros. The trading date is when the contract is signed. The fixing date is the date on which the reference rate is verified and compared to the forward interest rate.

For sterling, it is the same day as the settlement date, but for all other currencies, it is 2 working days before. If the FRA uses libor, then the LIBOR solution is the official offer of the sentence for Fixing Day. The reference price is published by the pre-established organization, which is generally proclaimed through Reuters or Bloomberg. Most FRAs use LIBOR for the contract currency for the reference rate on the fixing date. An otC interest rate agreement (FRA) is an over-the-counter interest rate derivative in which the buyer pays or receives at maturity the difference between a fixed interest rate and a reference rate applied for a given period, either on a bond or on a loan (the face value is never exchanged).

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