Forward Rate Agreement Principle

FRAs are paid in cash. The amount of the payment is equal to the net difference between the interest rate and the reference rate, usually liBOR, multiplied by a fictitious capital that is not exchanged, but which is simply used to calculate the amount of the payment. Since the recipient receives a payment at the beginning of the contract period, the calculated amount is discounted by the current value based on the futures price and the contractual period. 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. A forward interest rate is the interest rate for a future period. An interest rate agreement (FRA) is a kind of futures contract based on a forward interest rate and a benchmark rate, z.B.dem LIBOR, for a period of time to come. An FRA is like a forward-forward, since both have the economic effect of guaranteeing an interest rate. However, in the case of a futures contract, the guaranteed interest rate is simply applied to the loan or investment to which it applies, while an FRA achieves the same economic effect by paying the difference between the desired interest rate and the market rate at the beginning of the term of the contract. FRAs, like other interest rate derivatives, can be used to hedge interest rate risks, to take advantage of speculation or to benefit from arbitrage.

The FRA determines the rates to be used at the same time as the termination date and face value. FSOs are billed on the basis of the net difference between the contract interest rate and the market variable rate, the so-called reference rate, liquid severance pay. The nominal amount is not exchanged, but a cash amount based on price differences and the face value of the contract. The parties are classified as buyers and sellers. The purchaser of the contract who wants a fixed interest rate is conventionally receiving a payment if the reference rate is higher than the FRA rate; if lower, then the seller receives payment from the buyer. Buyers and sellers are sometimes also called borrowers and lenders, although the fictitious investor is never loaned.