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org/wiki/Forward_rate_agreement
Contents
1 The instruments on which FRAs are based
2 Properties
3 Payoff formula
4 FRAs Notation
5 Valuation
6 Glossary
7 See also
7.1 Associations
7.2 Lists
8 External Links
9 Reference
- A large international market exists for time deposits issued by large banks in different currencies.
- The Eurodollar deposit is a dollar deposited outside of the U.S. They are the primary time deposit instrument.
- Banks borrow from each other through Eurodollar time deposits, which are short-term unsecured loans.
- Quoted as an add-on yield rather than on a discount basis.
The London Interbank Offer Rate or LIBOR, is the most common rate for borrowing or lending in the Eurodollar/time
deposit market. This rate is frequently used in derivative contracts. London banks use LIBOR in their transactions with
other banks. LIBOR is typically the rate charged to private, high quality borrowers. Trading in euros/euro deposits occurs
in major global cities - 2 rates are used. EuroLIBOR, and Euribor.
Properties
In Derivatives market, a Forward Rate Agreement (FRA) is a forward contract Between two parties to exchange an
interest rate differential on a notional principal amount at a given future date (Attention NOT expiration) in which one
party, the Long, agrees to Pay a fixed interest payment at a quoted contract rate and Receive a floating interest payment at
a reference rate (Underlying rate), determined at Expiration day (Maturity).
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Forward rate agreement - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Forward_rate_agreement
Payoff formula
The FRA payoff formula is:
Where
Note that if the floating rate underlying the agreement turns out to be below the forward rate specified in the contract, the
numerator in the formula is negative and the short receives a payment from the long.
FRAs Notation
FRA Descriptive Notation and Interpretation
Valuation
Glossary
LIBOR
Euribor
Compare and contrast Forward Rate Agreement to Interest Rate Option
(http://en.wikipedia.org/wiki/Interest_rate_derivative)
See also
Derivative securities
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Forward rate agreement - Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Forward_rate_agreement
Forward contract
Equity forward contract
Bond forward contract
Currency forward contract
Swap
Forward starting swap
option
interest rate swap
financial future
Associations
Lists
External Links
Investopedia (http://www.investopedia.com) - Investor Education
Terminology & FAQ from ISDA (https://www.isdadocs.org/conf/index.html)
ISDA presentations on risk management and capital issues (https://www.isdadocs.org/conf/index.html)
What do I read to learn about derivatives?
(http://www.bus.lsu.edu/academics/finance/faculty/dchance/Research/ReadingList.htm)
Don Chance's List of Derivatives Sites on the Web
(http://www.bus.lsu.edu/academics/finance/faculty/dchance/Research/DerivativesSites.htm)
Reference
Don M Chance, Ph.D., CFA "Analysis of Derivatives for the CFA Program," CFA Institute, pp.34-36
Chance, Don M. Analysis of Derivatives for the CFA Program. Charlottesville: Association for Investment
Management and Research (2003). This book prepares CFA candidates for taking the exam. Treatment of
derivatives is focused strictly on what you need to know to pass the exam. Don't buy it to learn derivatives, because
it's not oriented toward a derivatives specialist. But do buy it if you have to pass the CFA exam.
Edit
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