Forward Rate Agreements (Fras)

Ondřej Havlín 20.9.2021
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The agreement on the rate in the future could have a maximum duration of five years. The nominal amount of $5 million is not exchanged. Instead, the two companies involved in this transaction use this figure to calculate the interest rate spread. As a hedge vehicle, FRA short-term futures (STIRs) are similar. But there are a few differences that set them apart. 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. In other words, a term interest rate agreement (FRA) is a tailor-made, non-payment financial futures contract on short-term deposits. An FRA transaction is a contract between two parties for the exchange of payments on a deposit, the so-called nominal amount, which must be determined on the basis of a short-term interest rate called the reference rate, over a period predetermined at a future date. FRA operations are recorded as hedges against changes in interest rates. . .


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