Forward Rate Agreement Receiver

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. The Forward Rate Agreement or FRA is an over-the-counter cash interest rate derivative. It is a contract between two parties who wish to protect themselves against interest rate risks. As part of this agreement, two parties agree to exchange future interest payments on the basis of a certain nominal amount. In this case, the first part is required to make payments to the second part at a specified fixed interest rate and the second party makes payments to the first part at a variable rate called the reference rate. Libor (London Interbank Offered Rate) and EURIBOR (European Interbank Offered Rate) are the most frequently used benchmark interest rates. An FRA is basically a loan to leave in advance, but without the exchange of capital. The nominal amount is used simply to calculate interest payments. By allowing market participants to act today at an interest rate that will be effective at a later stage, CSA allows them to guarantee their commitment to interest in future commitments. As noted above, the amount of compensation is paid in advance (at the beginning of the term of the contract), while interbank rates, such as LIBOR or EURIBOR, apply to late interest transactions (at the end of the repayment period). To account for this, it is necessary to discount the difference in interest rates using the offset rate as a discount rate.

The settlement amount is thus calculated as the present value of the interest rate difference: a company will borrow 2,000,000 USD in 3 months for a period of 6 months. It is possible to borrow this amount today at LIBOR 6 months current 2.70425 % plus 150 basis points. However, the 6-month LIBOR is expected to reach 3.75% over the next three months. The CFO decides to reduce interest rate risk by purchasing a 3×9 advance rate agreement.

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