Forward Rate Agreement (FRA)

Protection against adverse development of interest rates for term deposits or loans.

How may we
assist you?

Fix interest rates
in advance for
subsequent period

You always receive confirmations with transaction parameters

Assistance and proposed strategy by a team of specialists

Enter into each transaction over the telephone or directly with a dealer 

Hedging against adverse development of interest rates

USEFUL INFORMATION

  • Agreement between the bank and its client, in which they agree on a future interest rate for a loan or term deposit over a pre-agreed future period
  • Intended for sole traders and companies who wish to hedge their interest rate risks
  • FRA makes it possible to fix in advance an interest rate for a future borrowing or deposit, i.e. to hedge against interest rate risk
  • Notional amount of the FRA is solely used as a basis for calculating FRA interest payments, notional amounts are not exchanged
  • Parties do not provide a loan to each other / accept term deposits from one another – they only exchange the difference between FRA rate (agreed interest rate) and the current financial market reference rate at the start of the FRA period (interest rate period)
  • FRA buyer always purchases a fixed FRA interest rate
  • Reference rate is set two business days before the start of the FRA period (interest rate period) and compared with the fixed FRA rate
  • FRA is settled at the beginning of the interest rate period by the party in the disadvantageous position
  • Payment equals discounted difference between the fixed FRA rate and the set value of the reference rate applied to notional amount and given interest period

  • There is a liquid market for FRAs with certain standard parameters (such as notional amount, reference rate and maturity)

  • FRA contains the following information:
  • Agreed interest rate (FRA rate)
  • Interest rate period (FRA period)
  • Interest rate period start, i.e. a future day, from which interest accrues on a deposit
  • Notional amount, i.e. deposit amount
  • Market rate that is used as the reference rate for the purpose of future performance under FRA (usually LIBOR)
  • Interest rate period for FRA is determined by two terms that specify the period of time from the trade date:
  • To the start of the FRA period
  • To the end of the FRA period

 

  • FRA “6 to 9”: period begins 6 months from the date of conclusion of the FRA and lasts for 3 months; in other words: the interest rate for a three month deposit, which starts to bear interest in six months, is agreed today.  

Level of payment when reference rate > FRA rate (FRA 3x6 concluded on 1 March)

Level of payment when reference rate < FRA rate (FRA 6x12 concluded on 1 March)

  • Profit or loss from interest rate transactions is affected by interest rate fluctuations
  • Clients may incur losses if their interest payment due under an agreement exceeds the amount to be paid by the bank
  •  
    • In this case, the client pays the difference between the two payments to the bank
    • If the transaction was negotiated as a hedging instrument, the client can regard this loss as the cost of hedging
    • Hedging protects clients from significant interest rate fluctuations that could result in serious financial problems for them