The seller of in a forward rate agreement (FRA) is planning to lend in the future and hedges by "locking" in the FRA's fixed rate, so that if rates decrease, this seller receives a cash settlement.
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A forward rate agreement (FRA) is a loan that starts in the future ("forward start loan") but where principal is not lent; instead, the notional is referenced to determine the interest paid. The FRA contract specifies a fixed rate of interest. The seller (buyer) is lending (borrowing) at the...
Learning objective: Describe the method of mapping forwards, forward rate agreements, interest rate swaps, and options.
717.1. A portfolio manager evaluates the risk of the following two-bond portfolio:
We assume that specific risk is negligible and that the volatility of...
Learning objectives: Calculate the theoretical price of a bond using spot rates. Derive forward interest rates from a set of spot rates. Derive the value of the cash flows from a forward rate agreement (FRA).
713.1. Consider the steep spot (aka, zero) rate curve illustrated below...