Forward Rate Agreement is a version of over-the counter derivatives that are designed to meet certain requirements. It is a kind of agreement where two parties are involved and through this agreement these parties fix a forward interest rate. This forward interest rate is applicable to a pre-decided speculative amount of money, which may be a loan or any kind of deposit amount. The time limit in this type of contract is always pre-decided. A combination of Forward Rate Agreements is called swap. Forward Rate Agreement is mainly used by the banking institutions for different purposes. At the same time, financial activities that are related to high risk also use the Forward Rate Agreement to reduce the risk factors.
The Forward Rate Agreement is a credit instrument where the credit risk is circumscribed. It is used to get the same results that are expected from a forward-to-forward arrangement. Exchange of principal does not take place in the Forward Rate Agreement and no transaction fee is charged for these agreements. The transactions take place through phone or through telex and services like central clearing is not available for Forward Rate Agreement. One can stop the transaction whenever the situation demands so. For the purpose, one has to become a part of a new Forward Rate Agreement. There are certain currencies that have no financial futures but the FRA is providing services for these currencies as well. The main markets of Forward Rate Agreement are in the US dollar, euro, yen and so on.
The Forward Rate Agreement follows the terms and conditions of the British Bankers’ Association. The terms and conditions set for this purpose are known as BBAFRA terms. These terms or guidelines are very helpful for the market practice or Forward Rate Agreements. At the same time, if any party is not ready to follow the guidelines provided by BBA then it should be clarified before entering into the agreement.
Last Updated on : 1st July 2013