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[US\$ 3×9 – 3.25/3.50% p.a] – means that the interest on deposits is 3.25% from 3 months for 6 months and the credit rate from 3 months is 3.50% for 6 months (see also the letter margin). The seizure of an “FRA payer” means paying the fixed interest rate (3.50% per year) and obtaining a variable rate of 6 months, while the entry of a “receiver-FRA” means paying the same variable rate and obtaining a fixed rate (3.25% per year). A forward interest rate agreement is a forward contract on the below, the underlying of which is an interest rate. FRA are usually expressed in the convention “X x Y”, “X” represents the starting point of the underlying loan. This is also where the FRA comes to an end. “Y” represents when the underlying loan ends. A FRA of 3 x 9 is shown in the figure below. Ndisplaystyle N} being the fictitious rate of the contract, R {displaystyle R} the fixed interest rate, r {displaystyle r} the published IBOR fixing rate and d {displaystyle d} the decimalized dawn on which the start and end dates of the IBOR rate extend. For USD and EUR, an ACT/360 convention follows and the GBP is followed by an ACT/365 convention. The cash amount is paid at the beginning of the value applicable to the interest rate index (depending on the currency in which the FRA is traded, either immediately after or within two working days of the published IBOR fixed rate). Now we need to discount FRA payments in time t, so we would use the LIBOR rate of t until the end of the period (i.e. in 5 months).

For example, if the Federal Reserve Bank is raising U.S. interest rates, the so-called monetary tightening cycle, companies would likely want to raise their borrowing costs before interest rates rise too dramatically. In addition, FRA are very flexible and settlement dates can be tailored to the needs of transaction participants. 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. “valuation” of futures contracts (non fra`s), i.e. Vt = PV (Ft-F0) A FRA can be used to hedge future interest rate or foreign exchange risks. The buyer insures against the risk of rising interest rates, while the seller hedges against the risk of falling interest rates. In other words, the buyer blocks the interest rate to protect himself from rising interest rates, while the seller protects against possible lower interest rates….