Overview
A forward rate agreement (FRA) is a forward contract in which two parties agree to exchange interest payments on a future date. A FRA is calculated at two rates: an agreed interest rate and a reference rate, on a set principal amount over the term of contract. Parties to the FRA agree to trade the short-term interest payments on a fixed date in the future. Under the FRA, the buyer pays interest at the agreed rate and the seller pays interest at the reference rate.
Features
A FRA hedges against interest rate changes. By buying a FRA, customers fix the interest rate on borrowings on a future date to hedge against the risk of future interest rate rise. Meanwhile, by selling the FRA, they fix the interest rate on investments on a future date to hedge against the risk of future interest rate declines.
FRA trading provides the following benefits:
1. FRA terms and conditions can be tailored to customers to meet their varying needs, so it is highly flexibility.
2. Though the principal may be large, what is to be paid is only the interest difference calculated. Thus the actual settlement may be a very small amount.
3. There is no payment until the date of settlement, with only one single payment of the interest difference on that day.
Procedures
1. The customer signs the Master Agreement for RMB Wealth Management with ABC and makes a request to ABC for a RMB FRA.
2. ABC offers the customer an RMB FRA solution and a quotation.
3. The customer accepts the solution and submits the completed Authorization Form for RMB Wealth Management to ABC.
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