Forward Rate Agreement Specification

In other words, a Discount Rate Agreement (FRA) is a short-term, tailored and agreed-upon financial futures contract. A transaction fra is a contract between two parties for the exchange of payments on a deposit, the notional amount, which must be determined later on the basis of a short-term interest rate called the benchmark rate over a predetermined period. FRA transactions are introduced as a hedge against changes in interest rates. The buyer of the contract blocks the interest rate to protect against an interest rate hike, while the seller protects against a possible drop in interest rates. At maturity, no funds exchange hands; On the contrary, the difference between the contractual interest rate and the market interest rate is exchanged. The purchaser of the contract is paid when the published reference rate is higher than the fixed rate agreed by contract and the buyer pays the seller if the published reference rate is lower than the fixed rate agreed by contract. A company trying to guard against a possible interest rate hike would buy FRAs, while a company seeking interest coverage against a possible interest rate cut would sell FRAs. This type of strategy is used when yields are expected to decline. This type of futures strategy is used when the CFO expects the cost of credit to increase.

Movements in the physical market are offset by movements in the futures market. Forward Rate Agreements (FRA) are over-the-counter contracts between parties that determine the interest rate payable at an agreed date in the future. An FRA is an agreement to exchange an interest rate bond on a fictitious amount. FRA FRA Payoff- From the seller`s point of view, the payment is indicated on the payment date T by ( () (1), N- the fictitious; – the closing period in years (z.B a three-month period ≈ 3/12 – 0.25) R – the fixed interest rate for the simple compilation. F – variable interest rate made in simple compoundation” From the point of view of the puyer, payment on the date of payment T is made by ( (2) [1] A futures contract is a contract/contract exchange-traded to buy/sell a certain amount of a commodity or financial instrument at a price set today for delivery or payment at a later date. It eliminates uncertainty, risk. Futures and futures are derivatives because their price is derived from an underlying physical product of the market. This is a risk management function that now blocks a price that will apply later.

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