FRA

What’s In Store For You

FRA

Dealings and Quotations

  • Deal Date (Transaction Date): The day the transaction is initiated.
  • Contract Period: The duration between the settlement date and the maturity date.
  • Settlement Date: This occurs 2 days before the start of the contract period and is when the settlement sum is paid.
  • Maturity Date: The date on which the contract concludes.
  • Settlement Sum: The amount paid or received as compensation according to the FRA terms, on the settlement date.
  • Fixing Date: The date on which the reference rate of the FRA is determined, typically two working days before the settlement date. However, this date can be mutually agreed upon by the parties involved.
  • Quotation Example: A quote of 9.75% - 10.25% against a three-month MIBOR for a 3 v/s 6 FRA indicates that the market maker:

    • Bid: Agrees to pay a fixed rate of 9.75% and receive the three-month MIBOR set three months from today.
    • Ask/Offer: Agrees to receive a fixed rate of 10.25% and pay the three-month MIBOR set three months from today.

More About FRA

  • Eligible Participants for Rupee FRAs: Banks, primary dealers and financial institutions can enter rupee FRAs for hedging exposure and market making. Corporations may participate in rupee FRAs solely to hedge the interest rate risk on an underlying asset or liability.

  • Eligible Participants for Non-Rupee FRAs: All participants are permitted to enter non-rupee FRAs exclusively to hedge an underlying exposure.

  • Protection for Buyers: An FRA safeguards buyers against an increase in interest rates on future borrowings, ensuring predictable interest costs.

  • Protection for Sellers: An FRA shields sellers from a decrease in interest rates on loans they plan to extend in the future, maintaining their expected return. 
    For more, contact derivatives@hdfc.bank.in.

An FRA (Forward Rate Agreement) is a contract between two parties to exchange a fixed interest rate for a floating rate on a specific amount at a future date. For example, a company planning to borrow USD 10 million in three months for a six-month term can use an FRA to lock in its future interest cost. The company pays a fixed rate today, while the FRA seller covers any difference between this rate and the future floating rate, ensuring predictable borrowing costs.

*The Most Important Terms and Conditions for each of our banking offerings features all the specific terms and conditions that govern their use. You must go through it thoroughly to fully understand the terms and conditions applicable to any banking product you choose.

Frequently Asked Questions

FRA (Forward Rate Agreement) is a financial contract where two parties agree to exchange interest payments on a set amount of money, with one party paying a fixed rate and the other paying a floating rate based on a future date.

 If you sell an FRA, you commit to paying the fixed interest rate and receiving the floating rate at the agreed-upon future date. This hedges against potential declines in interest rates.

FRAs are used to hedge against interest rate fluctuations, allowing parties to lock in future interest rates today. They are also used for speculation on future interest rate movements.

The settlement amount in an FRA is calculated based on the difference between the agreed FRA rate and the actual floating rate (e.g. London Interbank Offered Rate - LIBOR) at the fixing date, multiplied by the notional amount.

Banks, financial institutions, corporations, and other entities exposed to interest rate risk can buy FRAs to hedge against future interest rate changes.