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Forward Rate Agreement

FRA is intended for:

Legal entities including municipalities, nationals as well foreigners, requesting hedging of the interest rate risk resulting from a possible - from the client’s point of view - negative development of the given interest rate.

Characteristics of FRA:

FRA (Forward Rate Agreement) is a contract concluded between the bank and the client, the object of which is an agreement on the future interest rate for a particular term deposit or loan within a certain agreed future term.

At the same time, no party actual provides to the other party a loan or accepts a term deposit from the other party, but the parties only exchange the difference between the interest rate agreed in the FRA transaction (the "FRA rate") and the actual market interest rate published on the financial market within the agreed time limit with respect to the term deposit or loan, which corresponds exactly to the terms of the FRA transaction.

FRA nominal amount only serves the purpose of payment amount derivation resulting from FRA transaction, there is no exchange of nominals.

The float interest rate is fixed and compared with the fix FRA interest rate two business days before the commencement of the interest period.

The settlement is performed by one cash flow at the beginning of the interest periods.

The payment is made by the party in disadvantageous position.

The payment amounts to a discounted difference between the fix FRA rate and the value of the float reference interest rate referring to the given interest period length.

FRA buyer is always in the position of fix FRA interest rate buyer.

Certain characteristics as volume, reference interest rate type and maturity are common in practice and there is a liquid market for them.

With the help of FRA, it is possible to fix in advance the interest rate for which the client will borrow or which the client wants to receive (hedging).

FRA deal includes the following data:

agreed interest rate,
interest period (FRA period),
the commencement of the interest period, i.e. the future date from which the deposit bears interest,
a nominal amount, i.e., the amount of the deposit,
the market interest rate, which will is used as the reference rate during the future performance of the FRA (usually LIBOR).

The interest period of an FRA is determined by two time limits determining the time distance from the execution date of the FRA until the beginning of the FRA period and until the beginning of the FRA period.

This means, for instance, that the FRA period in the case of an FRA "6 to 9" commences on the date that is 6 months after the trade date of the FRA and lasts for three months, i.e., an interest rate for a three-month deposit that will start bearing interest after six months is agreed today.

Netted Payment amount when reference rate > FRA rate (FRA 3x6 concluded on 1.3.)

Netted Payment amount when reference rate < FRA rate (FRA 6x12 concluded on 1.3.)

The deal is always concluded with the Sales dealer by phone.

The client receives deal confirmation containing the agreed parameters of the deal.

Risks

The potential for a profit or a loss from interest rate transactions is influenced by the movement of interest rates.

A possible loss occurs when the client is in disadvantageous position, i.e. the interest payment paid by the client is bigger that the payment paid by the bank. The client pays the difference of these payments then.

However, if the deal was concluded for the hedging purposes, the client considers this loss as a cost of hedging. The hedging protects the client against such a significant change of the interest rates that could cause him/her serious financial problems.

Benefits of FRA:

a method of securing interest risk
arrangement of the deal over the phone
possibility of arranging individual amounts, lengths and beginning of the interest period
there are no fees or commission related to the deal
there is a relatively liquid market for this type of product

FRA allows you to:

secure capital against a drop in interest rates (if the client has invested into instruments subject to a flexible interest rate)
secure capital against growth in interest rates (if the client is repaying a loan subject to a flexible interest rate)

How can you obtain a FRA?

If you are interested in gaining more information about this product or would like to arrange it directly, visit any branch of KB or call free of charge on the KB Info line 800 111 055.