Forward rate agreement

Forward rate agreement

In finance, a forward rate agreement (FRA) is a forward contract in which one party pays a fixed interest rate, and receives a floating interest rate equal to a reference rate (the underlying rate). The payments are calculated over a notional amount over a certain period, and netted, i.e. only the differential is paid. It is paid on the "effective date". The reference rate is fixed one or two days before the effective date, dependent on the market convention for the particular currency. FRAs are over-the counter derivatives. A swap is a combination of FRAs.

The payer of the fixed interest rate is also known as the borrower or the buyer, whilst the receiver of the fixed interest rate is the lender or the seller.

Payoff formula

The netted payment made at the effective date is:

mbox{Payment} = mbox{Notional Amount} * left( frac{(mbox{Reference Rate}-mbox{Fixed Rate}) * alpha }{ mbox{Reference Rate} * alpha +1} ight)

* The Fixed Rate is the rate at which the contract is agreed.
* The Reference Rate is typically Euribor or LIBOR.
* alpha is the "day count fraction", i.e. the portion of a year over which the rates are calculated, using the day count convention used in the money markets in the underlying currency. For EUR and USD this is generally the number of days divided by 360, for GBP it is the number of days divided by 365 days.
* The Fixed Rate and Reference Rate are rates that should accrue over a period starting on the effective date, and then paid at the end of the period (termination date). However, as the payment is already known at the beginning of the period, it is also paid at the beginning. This is why the discount factor is used in the denominator.

FRAs Notation

FRA Descriptive Notation and Interpretation

ee also

*Derivative (finance)
*List of finance topics


Wikimedia Foundation. 2010.

Игры ⚽ Нужен реферат?

Look at other dictionaries:

  • forward rate agreement — ( FRA) A customized agreement between two parties specifying the rate to be paid at some future date. Usually tied to LIBOR. American Banker Glossary ( FRA) Agreement to borrow or lend at a specified future date at an interest rate that is fixed… …   Financial and business terms

  • forward rate agreement — (FRA) An agreement under which one party undertakes to make to the other party payments calculated by reference to a specified fixed interest rate on a notional principal sum in respect of a period in the future. Similarly, the other party agrees …   Law dictionary

  • Forward rate agreement — контракт между банком и клиентом, гарантирующий процентную ставку по отношению к определенной сумме в течение обусловленного периода. Синонимы английские: FRA См. также: Банковские процентные ставки Финансовый словарь Финам …   Финансовый словарь

  • Forward Rate Agreement — Un Forward Rate Agreement, ou FRA, est un produit dérivé utilisé sur le marché monétaire. Il s agit d un contrat forward, négocié de gré à gré entre deux contreparties et dont l objectif est la fixation dès aujourd hui d un taux in fine de… …   Wikipédia en Français

  • Forward Rate Agreement — Ein Forward Rate Agreement (FRA) ist ein außerbörsliches Zinstermingeschäft (Derivat), das es ermöglicht, einen Zinssatz für einen in der Zukunft liegenden Anlagezeitraum zu sichern. Die Vereinbarung erfasst dabei nicht die eigentliche Geldanlage …   Deutsch Wikipedia

  • Forward Rate Agreement - FRA — An over the counter contract between parties that determines the rate of interest, or the currency exchange rate, to be paid or received on an obligation beginning at a future start date. The contract will determine the rates to be used along… …   Investment dictionary

  • Forward Rate Agreement (FRA) — Zinsausgleichsvereinbarung, bei der für eine künftige Mittelaufnahme oder anlage ein bestimmter Zins, die Forward Rate, vereinbart wird. Ist zum Zeitpunkt der Mittelaufnahme oder anlage der aktuelle Geldmarktzinssatz über die Forward Rate… …   Lexikon der Economics

  • forward-rate agreement — FRA 1) A contract between two parties that determines the rate of interest that will apply to a future loan or a deposit, which may or may not materialize. 2) A specified amount of a specified currency to be exchanged on an agreed future date at… …   Accounting dictionary

  • forward-rate agreement — FRA 1) A contract between two parties that determines the rate of interest that will apply to a future loan or a deposit, which may or may not materialize. 2) A specified amount of a specified currency to be exchanged on an agreed future date at… …   Big dictionary of business and management

  • Forward rate agreement (FRA) — Agreement to borrow or lend at a specified future date at an interest rate that is fixed today. The New York Times Financial Glossary …   Financial and business terms

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”