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FRA (FORWARD RATE AGREEMENT) |
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  | FRA is intended for: |
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Especially clients who want to secure themselves (hedge) against interest rate risk.
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| FRA characteristics: |
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An FRA (Forward Rate Agreement) is a contract between the bank and a client on a future interest rate for a specific term deposit or loan for a certain agreed future term, although no actual loan is provided nor is term deposit received - there is only an exchange of the difference the interest rate agreed under the FRA (the FRA rate) and the current market interest rate quoted on the financial market at an agreed future date for the term deposit or loan corresponding precisely to the terms of the FRA. The FRA's nominal value only serves to derive the amount paid under the FRA transaction and there is no actual exchange of the nominal values. The reference rate is fixed and compared with the FRA fixed rate two business days before the beginning of the interest period. Settlement is made by cash at the beginning of the interest period. Payment is made by the party in the disadvantageous position. The payment is equal to the discounted difference between the fixed FRA rate and the fixing value of the reference interest rate related to the length of the relevant interest period. The FRA buyer is always in the position of a fixed FRA interest rate buyer. In practice, certain characteristics (volume, type of reference interest rate and maturity) are standard and a liquid market exists for them. FRA can be used to fix an interest rate in advance (hedging) under which the client will take out a loan or which the client wants to receive.
The FRA contains the following data:
- agreed interest rate
- interest period (FRA period)
- beginning of interest period, i.e. the future date from which the deposit will bear interest
- the nominal amount, i.e. the size of the deposit
- the market interest rate used as the reference rate upon performance of the FRA in the future (usually LIBOR)
The interest period on an FRA is defined by two time-limits determining the time distance from the execution of the FRA to the beginning of the FRA period and to the end of the FRA period. For example, for a "6 to 9" FRA the FRA period begins 6 months after the date of the FRA's conclusion and lasts for three months. Or, in other words, an interest rate is agreed today for a three-month deposit which will begin to bear interest in 6 months time.
An FRA is always concluded by telephone with a dealer from the Treasury Department. The client receives a confirmation of the FRA containing the transaction's parameters.
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| FRA advantages: |
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- hedging against interest rate risk
- transaction agreed by telephone
- possibility of agreeing individual amounts, length and beginning of interest period
- no fees or commissions payable upon conclusion of transaction
- relatively liquid market exists for this type of product
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| FRA will enable you to: |
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- secure your capital against a rise or a fall in interest rates
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| How to obtain FRA? |
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You can ask for this product/service at any KB Bratislava business center. For further information about this product/service, please contact your Relationship manager or write to us to our e-mail address koba@koba.sk.
