A team of KB specialists will propose suitable hedging strategy and assist you in the implementation.
Have your interest costs under control.
We will be happy to answer any questions at KB Info line 800 521 521.
Companies that wish to hedge their interest rate risks.
About Forward Rate Agreement (FRA)
- Agreement between the bank and its client, in which they agree on a future interest rate for a loan or deposit over a pre-agreed interest period
- The FRA makes it possible to fix 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 calculation of 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 value of market reference rate at the start of the FRA period (interest rate period)
- FRA buyer always purchases fixed FRA interest rate
- Reference rate is set two working days before the start of the FRA period (interest rate period) and compared to the fixed FRA rate
- FRA is settled in advance at the beginning of the interest rate period by the party in disadvantageous position
- The payment equals discounted difference between FRA rate and set value of reference rate applied to notional amount and given interest period
An FRA “6 to 9” period begins 6 months after the date of conclusion of the FRA and lasts for 3 months. Or: an 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 1.3.)
Level of payment when reference rate < FRA rate (FRA 6x12 concluded on 1.3.)
You might also like to know
- There is a liquid market for FRAs with 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
- Notional amount – i.e. deposit amount
- Reference rate – market rate which is compared to agreed interest rate at interest rate period start to calculate profit or loss on 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
Important information for you
- Profit or loss from interest rate transactions including FRA is affected by interest rate fluctuations
The client realizes a loss if the client’s interest payment due under the contract exceeds the amount to be paid by the bank
- In this case, the client pays a difference of the two payments to the bank
- If the transaction was negotiated as a hedging instrument, the loss represents the cost of hedging
- Hedging protects clients from significant interest rate fluctuations that could result in serious financial problems