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