Kontrakt Forward Rate Agreement (Fra)

A currency forward settlement can be either on a cash or delivery basis, which is related to the fact that the mutual option is acceptable and has been mentioned in the contract. The main objective of FRA contracts is to ensure investors a future level of interest rates. They are the most frequently closed for a period of less than one year and their reference rate in Poland is the WIBOR (i.e. the interest rate differentials between the forward rate on the closing date of the FRA operation and the amount of the WIBOR rate on the settlement date). FRA contracts as an interest rate guarantee are recommended in particular for borrowers (who repay their interest obligations on the basis of variable rates) and investors (who place their funds at variable rates). Ndisplaystyle N} being the fictitious rate of the contract, R {displaystyle R} the fixed interest rate, r {displaystyle r} the published IBOR fixing rate and d {displaystyle d} the decimalized dawn on which the start and end dates of the IBOR rate extend. For USD and EUR, an ACT/360 convention follows and the GBP is followed by an ACT/365 convention. The cash amount is paid at the beginning of the value applicable to the interest rate index (depending on the currency in which the FRA is traded, either immediately after or within two working days of the published IBOR fixed rate). W celu rozpoczęcia współpracy dotyczącej zawierania kontraktów FRA, firma zobowiązana jest do podpisania z danym bankiem umowy ramowej, posiadania w danym banku rachunku bankowego oraz do ustanowienia zabezpieczenia kontraktu. A borrower could enter into a rate agreement in advance for the purpose of guaranteeing an interest rate if the borrower believes that interest rates may increase in the future. In other words, a borrower might want to set their cost of borrowing today by entering into a FRA. The cash difference between the FRA and the reference rate or variable rate shall be paid on the date of the value or on the date of invoice. Forward interest rate agreements (FRA) are linked to short-term interest rate futures (STIR).

Since STIR futures oppose the same index as a subset of FRAs, IMM FRAs, their pricing is linked. The nature of each product has a unique gamma profile (convexity), which leads to rational price adjustments, not arbitrage. This adjustment is called a term convexity adjustment (CFL) and is normally expressed in basis points.

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