Forward Rate Agreement
Interest
Interest
PSSIB's FRA (Forward Rate Agreement)
An FRA will have two interest rate in the contract:
How Forward Rate Agreement Works?
Suppose the current month is May
There are two scenarios that possibly occurs when company A agrees on the agreement with PSSIB.
If the Floating Rate on June is at 7 percent, which exceeds the Fixed Rate
If the Floating Rate on June is at 5 percent, which is lower than the Fixed Rate
Using FRAs is seen to be a win-win situation, since at maturity, only the difference between contracted interest rate and the market is being exchanged, and no funds exchange occurs.
- the cash settled forward contract on interest rate that is used by large banks and corporations to hedge future interest rate exposure.
- Under this agreement, the borrower (buyer) and the lender (seller) agree to pay each other the interest difference between the agreed-upon rate (the Fixed Rate) and the actual interest rate on the future date (the Floating Rate).
An FRA will have two interest rate in the contract:
How Forward Rate Agreement Works?Suppose the current month is May
There are two scenarios that possibly occurs when company A agrees on the agreement with PSSIB.
If the Floating Rate on June is at 7 percent, which exceeds the Fixed Rate
If the Floating Rate on June is at 5 percent, which is lower than the Fixed Rate
Using FRAs is seen to be a win-win situation, since at maturity, only the difference between contracted interest rate and the market is being exchanged, and no funds exchange occurs.
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