Interest and liquidity management for companies a forward rate agreement (FRA) is an agreement of two parties, in which the rate of interest for a future period of time and for an agreed nominal amount is fixed. No agreement on the exchange of capital will be made at the FRA. FRAs are quoted in the popular maturities usually on both sides, i.e., it is called a money page (purchase of FRA) and a letter page (sale of FRA). When the quota of a FRA two numbers to determine the time periods are specified in addition to the interest rate (E.g. 3 x 9, say: 3 to 9 months FRA). The first number refers to the period between conclusion of the contract until interest rate setting (forward period + period). A 3 x 9 FRA has thus a 3-month lead period and a total exercise duration; the interest period is 6 months (total running time minus lead time). At the beginning of the agreed interest period, the reference interest rate is compared with the FRA agreed interest rate.
Is the reference interest rate (E.g. EURIBOR) on the FRA – rate, so is the difference between the reference rate and FRA rate the buyer of the FRA remunerated. Analog, FRA buyer must refund the difference insofar as the reference interest rate under the FRA – rate. A possible settlement amount will be paid in accordance with the practices of the FRA market at the beginning of the period, as a result of the comparison between the reference rate and FRA rates, in the form of discounted. In connection with financing, the buyer of a FRA secures the interest rate for the relevant period. The actual financing costs resulting from the addition of FRA – interest rate and margin of financing of EURIBOR. Determinants of FRA nominal FRA rate total running time: 4 to 24 months (forward – and interest period) flow period: 1 to 21 months interest period: period of interest rate hedging 3, 6, 9 or 12 months of reference interest rate: EURIBOR, LIBOR,… Fixing: Time of interest rate comparison (FRA – interest rate / reference rate) applications on the liabilities side of planned borrowing interest rate protection: when the liquidity planning a Future identified emerging demand for credit, so by buying, you can fixed advance interest expense for this money market borrowing of FRAs.
Interest rate protection of existing loans: a company of interest rate increases, expects so existing variable interest rate loans can be secured by the purchase of FRAs against the risk of rising interest rates. Applications on the asset side of interest rate hedging of planned investments: a company expects a liquidity surplus in the future and keeping current rates for attractive, so the interest for a period of time in the future can be fixed now. Interest rate protection of existing investments: existing investments against the risk of declining interest rates can be secured through the sale of FRAs. Exit from an FRA – by an offsetting transaction at any time.