Future Of Forward Rate Agreement

9 décembre 2020

A advance rate agreement (FRA) is ideal for an investor or company that wants to lock in an interest rate. They allow participants to make a known interest payment at a later date and obtain an unknown interest payment. This helps protect investors from the volatility of future interest rate movements. With the conclusion of an FRA, the parties agree to an interest rate for a given period beginning at a future date, based on the principal set at the opening of the contract. Just as stock index futures reflect the cash-P-500 market and soybean futures reflect the spot soybean market, eurodollar futures should position themselves at levels reflecting implied prices or interest rates in the fra market. In addition, eurodollar futures prices directly reflect and reflect the yield curve. This is intuitive considering that a euro-dollar futures contract represents a three-month investment that will be concluded in N-Days in the future. If future Eurodollars did not reflect IFRs, there would certainly be a possibility of arbitration. Futures are hedging instruments that are used by investors to block a specific interest rate: this is recorded in the rating in which the future is indicated as the difference between 100 and the interest rate blocked at the time of purchase. Today, when a future contract is traded at 97, this means that an investor is able to set the interest rate at 3% at the end of the contract.

We point out that the fixing or blocking of a given interest rate only occurs if the future is used as a hedging instrument, i.e. only if it is used in conjunction with another financial instrument that presents an opposite view of interest rate movements. In this part, we will now introduce appointment contracts and interest bonuses. These two contracts now allow you to lock in interest rates for loans at future time intervals. The rate you are blocking today is what is called the outpost rate. In the case of maturity and in the case of interest rate futures, it is called the forward rate. We will get forward rates and forward payments. Forward Rate Agreement FRA on the t calendar date is indicated by a future period (T-0, T-1) with lengths that we will describe by δ, a fixed K set and a fictitious N. In the case of T-1, the holder of the advance rate agreement pays a fixed K rate on the nominal price and in turn receives the variable interest rate on face value. This is called floating, because this rate is only known in the future T-0. This advance rate agreement allows you to lock in a fixed rate for the future period (T-0, T-1) today.

Suppose you know that you are going to borrow with N fictitious at the time T-0) Depending on the market conditions that prevailed at the time, you had to repay the loan with the single price L (T-0, T-1). Assuming you don`t like the uncertainty of this interest rate cash flow today and instead want to trap a K rate that is set today and that you will pay for that loan. Keeping this forward rate deal does just that. Remember that you have to pay the fixed sentence K and you get the floating. As you can see now, suspended payments are simply cancelled. And in fact, what you pay for is the K sentence. Of course, the question that arises is what is a fair firm price K, which you will fix today in light of market information, which are all zero coupon to t bond prices. To answer this question, we are now calculating the value of this advance rate agreement and placing it at 0. We start with the payment of the advance rate agreement to T-1.