FRAs are not loans and do not constitute agreements to lend any amount of money to another party, on an unsecured basis, at a known interest rate. Their nature as an IRD product only produces leverage and the ability to speculate or hedge interest rate risks. This allows us to see how interest rates change the value of the FRA changes, which in turn results in a counterparty and an equivalent loss for the other counterparty. A term statement may be made either in cash or on a delivery basis, provided that the option is acceptable to both parties and has been previously defined in the contract. The lifetime of a FRA consists of two periods: the waiting or transmission time and the duration of the contract. The waiting period is the start period of the fictitious loan and can take up to 12 months, although durations of up to 6 months are the most frequent. The duration of the contract covers the duration of the fictitious loan and can last up to 12 months. Interest rate swaps (IRSS) are often considered a set of FRAs, but this view is technically wrong due to differences in calculation methods for cash payments, resulting in very small price differentials. A term rate is the interest rate for a future period. A term rate agreement (FRA) is a kind of futures contract based on a futures price and a reference rate, such as LIBOR, for a future time interval. A FRA is similar to a forward in advance, as both have the economic effect of guaranteeing an interest rate. However, in the case of a futures contract, the guaranteed interest rate simply applies to the loan or investment to which it applies, while a FRA produces the same economic effect by paying the difference between the desired interest rate and the market rate at the beginning of the contract term. Like other interest rate derivatives, FRA can be used to hedge interest rate risks, for the profit of speculation or for the profit of arbitrage.

Suppose the interest rate falls to 3.5%, let`s re-exonerate the value of the FRA: [US$ 3×9 – 3.25/3.50% p.a] – means that the interest on deposits from 3 months is 3.25% for 6 months and the credit rate from 3 months is 3.50% for 6 months (see also the monetary margin-letter). The seizure of an “FRA payer” means paying the fixed interest rate (3.50% per year) and obtaining a variable rate of 6 months, while the entry of a “receiver-FRA” means paying the same variable rate and obtaining a fixed rate (3.25% per year). The treasurer opts for the purchase of a FRA 6×12 to cover the period of 6 months from 6 months. He received an offer of 0.95450% from his bank and bought the FRA on April 8 for a face value of $1,000,000. . . .