Forward Rate Agreement Numericals

The lifetime of a FRA consists of two periods: the waiting or transmission time and the duration of the contract. The waiting period is the start period of the fictitious loan and can take up to 12 months, although durations of up to 6 months are the most frequent. The duration of the contract covers the duration of the fictitious loan and can last up to 12 months. The FRA sets the rates to be used at the same time as the date of termination and the nominal value. FRA are settled in cash on the basis of the net difference between the interest rate of the contract and the market variable rate called the reference rate. The nominal amount is not exchanged, but a cash amount based on price differences and the nominal value of the order. FWD can lead to currency exchange, which would involve a transfer or billing of money to an account. There are periods of conclusion of a clearing contract that would be at the exchange rate in force. However, the netting of the futures contract has the effect of settling the net difference between the two exchange rates of the contracts. The effect of a FRA is to settle the cash difference between the interest rate differentials between the two contracts. On the fixing date (October 10, 2016), the 6-month LIBOR is set at 1.26222, which corresponds to the billing rate applicable to the company`s FRA. A borrower could enter into a rate agreement in advance for the purpose of guaranteeing an interest rate if the borrower believes that interest rates may increase in the future. In other words, a borrower might want to set their cost of borrowing today by entering into a FRA.

The cash difference between the FRA and the reference rate or variable rate shall be paid on the date of the value or on the date of invoice. Company buys $10 million 7 x 10 FRA at a fixed rate of 6.75% The entire contract ends after ten months. In this case, the FRA is launched now that the borrowing rate is 6.75% in seven months for a period of three months (from the seventh to the tenth month). The 3-month rate is currently 5.5% and after seven months at the expiration of the FRA, it is 5.2%. .

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