Forward Rate Agreement Trading


Suppose the interest rate falls to 3.5%, let`s reassess the value of the FRA: understanding how to value a loan and a forward rate agreement can therefore help us understand how to value a swap. It should be noted that, unlike a futures contract, swap cash flows are traded at several future dates. An advance interest rate agreement (FRA) is an over-the-counter contract with cash settlement between two counterparties, under which the buyer lends (and lends) a notional amount at a fixed rate (fra rate) and for a specified period from an agreed date in the future. Let`s calculate the 30-day credit rate and the 120-day credit rate to deduct the corresponding term interest rate which, at the beginning, makes the value of the FRA equal to zero: the parties are classified as buyers and sellers. Conventionally, the buyer of the contract who wants a fixed interest rate receives a payment when the reference rate is higher than the FRA rate; If lower, the seller receives payment from the buyer. Buyers and sellers are sometimes referred to as borrowers and lenders, although fictitious capital is never loaned….