How does a FRA work?
A. A FRA is an agreement between you and the Bank to exchange the net difference between a fixed rate of interest and a floating rate of interest. This exchange is based on the notional amount you require for the term nominated. The net difference between the two interest rates is applied against the underlying asset. For example, XYZ Corporation, who has invested on a fixed interest rate basis, has formed the view that interest rates are likely to rise. XYZ elect to receive variable for all or part of the remaining term of the investment using an FRA (or a series of FRA’s, (see Interest Rate Swaps), while their underlying investment remains fixed, but hedged. This process can be illustrated as follows: In this case, the two fixed cash flows offset each other, thereby achieving a variable rate for the investor.
Related Questions
- Rail Program Implementation and Schedule What programs will FRA use to fund the development of high-speed and intercity passenger rail?
- What is FRAs schedule for implementing these high-speed and intercity passenger rail grant programs?
- What specifications does FRA prescribe for the construction of track?
