Forward Rate Agreement 3X6

FRAs can be used effectively to maintain interest rates and thus bridge the gaps between interest rate-sensitive assets and liabilities on the balance sheet. That is why they are very useful in asset management. A borrower could enter into a rate agreement in advance for the purpose of guaranteeing an interest rate if the borrower believes that interest rates may increase in the future. In other words, a borrower might want to set their cost of borrowing today by entering into a FRA. The cash difference between the FRA and the reference rate or variable rate shall be paid on the date of the value or on the date of invoice. This is a 3 Vs 9 FRA with a counterpart for a nominal amount of Rs.1 crore. For example, if the counterparty cotulates 6.25/6.50 for a 3 vs. 9 FRA, the company buys the FRA at 6.50, which effectively means that it locks at 6.5% for the aforementioned credit commitment. The reference rate is a reference rate, essentially a variable rate such as T Bill Rate, Libor, etc., to compare the FRA rate to the settlement date and to compensate for interest rate differentials on fictitious capital. Consider a company that has an expected financing need after 3 months. There is concern that interest rates will rise from their current level and may therefore have to pay a higher interest rate for the loan. Here are the cash prices presented for different periods on a date15.

This can also be called a money market yield curve (unlike a long-term interest rate curve that spans several years). This fictitious interest rate curve can also be presented as in Figure 12 (this is an unrealistic interest rate curve, as the interest rate curve does not usually follow straight lines). The interest rate set by the FRA is a reference rate (also called a reference rate) or a rate that refers to a reference rate, i.e. certain tranches that are easily accepted by operators to represent the three-month tranche. We assume that this is the 3-month rate of JAIBAR14, which is a rate of return. If, on the date of performance, the prevailing market rate of the reference rate is higher than the contractual rate, the seller shall pay the difference to the buyer of the FRA; If, for example, the reference rate agreed by the counterparties on the settlement date, i.e. three months after the day on which the credit commitment is to be respected, corresponds to 7,00 %, the company`s view of the interest rate has been verified and the FRA seller pays the difference of 0,50 % (7 to 6,5 %) on the notional capital for a period of six months, Which is paid at 7%. If a company has lent for a period of 3 months, in 3 months, this is called 3 X 6 FRA. When it buys a FRA, it pays a certain fixed interest rate and gets a variable interest rate, which allows it to hedge against a rise in interest rates. When a company sells a FRA, it gets a particular fixed rate and pays a variable interest rate; Therefore, it insures against any drop in interest rates The example of fra above as well as the calculation of the invoice amount are presented in this Excel table. Interest rate swaps (IRSs) are often considered a series of FR A, but this view is technically wrong due to differences in calculation methods for cash payments, resulting in very small price differentials. .

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