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Forward Rate Agreements (FRA)
  • Can be viewed as a forward contract to borrow / lend money at a certain rate at some future date.

    Formula for payment to the long at settlement is:

    (notional principal)* [{(floating rate-forward rate)*(days/360)}/{1+(floating rate)*(days/360)}]
Example

FRA that settles in 30 days, $1mn notional, Based on 90-day LIBOR, Forward rate of 5%, Actual 90-day LIBOR at settlement is 6%.

Solution

ΔI = (6% - 5%) * (90/360)* $1m = $2,500

PV= 2,500 / (1 + (90/360)*6%) = $2,463





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