Forward Rate Agreement Auf Deutsch

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    A company`s budget programming for year 01 provides for an investment of €10 million on 1 July; it must be financed by the one-year credit, and the current variable interest rate at the time of budget planning is 1%. The total duration of the activity t3 is the sum of the period t1 and the investment period t2. FRA are often designated with an initial and total duration, i.e. fra 3×9 for a FRA with a t1 period of 3 months and a t2 investment period of 6 months. FRAs are money market instruments that are traded by both banks and companies. The FRA market is liquid in all major currencies, both by the presence of market creators and by the multiplicity of financial institutions that issued prices. As a hedging instrument against interest rates, FR is very similar to money market futures. There are, however, a number of differences, the most important of which are listed here. At the close of trading, the 3-month interest rate is 1.6% [note 1], the 6-month interest rate is 2.4%.

    The result is a fair forward interest rate of 3.187, which is also agreed in the form of a DE F rate. On the other hand, if the variable interest rate had fallen to 1%, below the FRA rate of 1.2%, the company would have to compensate for the difference of (1.2 to 1%) × €10 million = 0.2% × €10 million = €20,000 from the Bank; As a result, he would in turn have paid 1.2% interest (he borrows for 1% and pays the compensation of 0.2%). FRA are traditional instruments of financial management. It is a short-term instrument that is liquid for up to a year. Their use was particularly common in the second half of the 1980s and during the 1990s and was the second largest OTC interest rate derivative after interest rate swap. However, in recent years, the importance of FRA has declined sharply. According to the Bank for International Settlements (BIS), the global share of FRA in total OTC interest rate derivatives almost halved between 1998 and 2007, from 11.5% to just 6.6%. Your email address will not be published. All fields are required. The CFO therefore decides to buy a FRA 6×12 to cover the interest rate risk.

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