16 set Forward Rate Agreement Formel
A forward rate agreement (FRA) is a financial contract in which two parties agree to exchange cash flows at a specified future date, based on a predetermined interest rate. FRAs are commonly used by financial institutions, corporations, and investors to hedge against interest rate risk.
The formula for calculating the FRA settlement amount is as follows:
FRA Settlement Amount = Notional Amount x (Forward Rate – Agreed Rate) x (Days in FRA/360)
The notional amount is the nominal value of the underlying loan or investment. The forward rate is the rate that will apply at the settlement date, while the agreed rate is the rate agreed upon at the inception of the FRA contract. The days in the FRA refers to the number of days between the contract’s start date and the settlement date.
Let’s take an example to understand this formula better:
Suppose two parties agree to a six-month FRA contract with a notional amount of $1 million and an agreed rate of 5%. The parties agree to exchange cash flows on the settlement date, based on the six-month LIBOR rate prevailing at that time. Suppose that on the settlement date, the six-month LIBOR rate is 5.5%.
The FRA settlement amount would be calculated as follows:
FRA Settlement Amount = $1,000,000 x (5.5% – 5%) x (180/360) = $2,500
This means that one party would pay the other $2,500 on the settlement date to settle the FRA contract.
In summary, the FRA formula is a simple but powerful tool used to calculate the settlement amount of FRA contracts. Understanding this formula is essential for anyone looking to trade in FRAs or use them to manage interest rate risk.