Forward Rate Agreement Underlying(预告)

A forward rate agreement, also known as an FRA, is a type of financial contract that allows two parties to lock in an interest rate for a future period of time. This type of agreement is commonly used in the financial industry, particularly in the world of derivatives trading.

At its core, an FRA is a contract between two parties where one agrees to pay the other a fixed interest rate on a predetermined amount of money for a specified period in the future. The agreement is based on a reference interest rate, such as LIBOR or Euribor, and the underlying asset is the difference between that reference rate and the fixed interest rate agreed upon between the two parties.

The underlying of an FRA is the interest rate that the agreement is based on. This interest rate is typically based on a widely recognized benchmark rate, such as LIBOR or Euribor. The underlying rate is used to calculate the settlement amount that the parties will exchange at the end of the FRA contract period.

For example, let’s say that Party A and Party B enter into an FRA contract with an underlying interest rate of 5%. The duration of the contract is six months, and the notional amount is $1 million. At the end of the six months, if the reference interest rate is 4%, Party A will pay Party B the difference between the underlying rate of 5% and the reference rate of 4% multiplied by the notional amount of $1 million. In this case, Party A would pay Party B $5,000.

FRAs can be used by a variety of parties, including banks, corporations, investors, and traders. They are often used to hedge against interest rate risk, as they allow parties to lock in a fixed rate for a future period of time. They can also be used to speculate on future interest rate movements.

In conclusion, a forward rate agreement underlying is the interest rate that the agreement is based on. It serves as the reference rate for the contract and is used to calculate the settlement amount at the end of the contract period. FRAs are a widely used financial instrument in the derivatives market, serving to hedge risk and speculate on future interest rate movements.