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FRA Notation Guide
- 1×4 FRA: Starts in 1 month, ends in 4 months (3-month loan)
- 3×6 FRA: Starts in 3 months, ends in 6 months (3-month loan)
- 6×12 FRA: Starts in 6 months, ends in 12 months (6-month loan)
- Settlement: Cash payment at start of loan period
FRA Settlement Result
Formula Breakdown
Settlement Interpretation
| Scenario | Pay Fixed | Receive Fixed |
|---|---|---|
| R > FRA (Rates Rose) | Receive (+) | Pay (-) |
| R = FRA (No Change) | None (0) | None (0) |
| R < FRA (Rates Fell) | Pay (-) | Receive (+) |
Understanding Forward Rate Agreements
What is an FRA?
A Forward Rate Agreement (FRA) is an OTC derivative that allows parties to lock in an interest rate for a future borrowing or lending period. Unlike interest rate swaps with multiple payments, an FRA covers a single period with cash settlement at the beginning.
Why Settlement at Start?
FRAs settle at the beginning of the loan period, not at the end. Since the payment covers interest that would accrue over the period, we discount it back to present value. This is why we divide by [1 + R × (days/DCC)].
Pay Fixed vs Receive Fixed
Pay Fixed (FRA Buyer)
Profits when rates rise. You've locked in a lower rate than the market. Hedges against borrowing cost increases.
Receive Fixed (FRA Seller)
Profits when rates fall. You're betting the contracted rate will be better than market. Hedges lending income.
Common FRA Uses
- Hedging: Lock in borrowing costs for planned loans
- Speculation: Profit from interest rate views
- Arbitrage: Exploit rate discrepancies
Frequently Asked Questions
Disclaimer
This calculator is for educational purposes only. Actual FRA settlements may differ due to market conventions, documentation terms, and counterparty agreements. Consult a qualified professional for hedging decisions.
