Abstract
A forward rate agreement, abbreviated as FRA, is a contract in which both contract parties agree to a fixed rate K on a principal N to be paid for some future interest period between T and T_. An FRA can be interpreted as an agreement loan to be made in the future with an interest rate already fixed today. The party receiving the loan makes the fixed interest payments. In contrast to bonds, we will refer to this party’s position as a long position in the FRA, whereas the counterparty receiving the interest payments is short in the FRA. A (long) FRA can thus be interpreted as an agreement on two future cash flows: a receipt of the principal N at time T (the loan is made) and a payment at maturity T_ of the FRA in the amount of the principal N compounded at the agreed rate K over the period T_−T (the loan plus interest is paid back).
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
Copyright information
© 2002 Hans-Peter Deutsch
About this chapter
Cite this chapter
Deutsch, HP. (2002). Forward Transactions on Interest Rates. In: Derivatives and Internal Models. Finance and Capital Markets Series. Palgrave Macmillan, London. https://doi.org/10.1057/9780230502109_17
Download citation
DOI: https://doi.org/10.1057/9780230502109_17
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-42999-8
Online ISBN: 978-0-230-50210-9
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)