An FRA is an agreement between the Bank and a Customer to pay or receive the difference (called settlement money) between an agreed fixed rate (FRA rate) and the interest rate prevailing on stipulated future date (the fixing date) based on a notional amount for an agreed period (the contract period).
In short, this is a contract whereby interest rate is fixed now for a future period.
The basic purpose of the FRA is to hedge the interest rate risk.
For example, if a borrower is going to borrow FC loan for 6 months at LIBOR rate after 3 months, he can buy an FRA whereby he can fix interest rate for the loan
FRAs can be used by customer who has a desire or need to alter their interest rate or cash flow profile to suit their particular needs. FRAs are used by customer looking to protect themselves from, or take advantage of, future interest rate movements.
A FRA can be arranged for one to six month terms, commencing up to 18 months from deal date.
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