Forward Rate Agreement Questions

Forward Rate Agreement Questions

Since FRA are paid in cash on the start date of the fictitious loan or deposit, the interest rate difference between the market rate and the FRA contract rate determines the commitment to each party. It is important to note that since the amount of capital is a nominal amount, there is no main cash flow. The trading date is when the contract is signed. The fixing date is the date on which the reference price is checked and then compared to the futures price. For the pound 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, libor-Fix is the official quote of the price for the fixing date. The benchmark rate is published by the established body, which is usually published via Reuters or Bloomberg. Most FRAs use LIBOR for the contract currency for the reference rate at the date of fixing. A term statement may be made either in cash or on a delivery basis, provided that the option is acceptable to both parties and has been previously defined in the contract. Unlike most futures contracts, the settlement date is at the beginning of the contract term and not at the end of the contract, since on that date the reference rate is already known, which makes it possible to determine liability. The requirement that payment be made sooner rather than later reduces credit risk for both parties. The duration of the contract is the date on which the duration of the contract ends.

The FRA period is usually indicated with regard to the date of the contract: number of months before the settlement date × number of months until the expiry date. Example: 1 x 4 FRA (sometimes this notation is used: 1 v 4) indicates that there is 1 month between the date of the agreement and the date of settlement and between the date of the agreement and the end of the 4-month period. This FRA therefore has a contractual duration of 3 months. An appointment is different from a futures contract. An exchange date is a binding contract in the foreign exchange market that sets the exchange rate for buying or selling a currency on a future date. A currency attacker is a hedging instrument that does not include an advance. The other great advantage of an exchange date is that, unlike standardized exchange dates, it can be adapted to a certain amount and a given delivery time. The nominal amount of $5 million is not exchanged. Instead, the two companies involved in this transaction use this figure to calculate the interest rate spread. Company A enters into a BUSINESS with Company B in which Company A obtains a fixed interest rate of 5% on a face value of $1 million in one year.


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