FRA's are agreements between two parties to exchange interest rates, where one party pays a fixed rate and receives a floating rate tied to a reference rate. For example, Company A agrees to pay 5% interest for one year on $1 million to Company B in three years, in exchange for Company B paying the one-year LIBOR rate on the principal. If the LIBOR is higher than 5% after three years, Company A must pay Company B the difference. FRA's allow parties to hedge against future interest rate movements.
Swaps explained. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=JKBKnxM2Nj4
Forward Rate Agreements, or FRAs, are a way for a company to lock in an interest rate today, for money the company intends to lend or borrow in the future.
Instrument d’informació per als auxiliars de conversa destinats a Catalunya i gestionats pel Ministerio de Educación. El contingut es divideix en una primera part d’explicació del sistema educatiu i de l’organització d’un centre escolar. En la segona part s’exposa l’estructura del Programa i les funcions i tasques dels auxiliars. En tercer lloc s’indiquen els tràmits administratius que els auxiliars han de dur a terme i finalment es troba informació addicional amb dades i adreces d’interès.
Swaps explained. Very useful for CFA and FRM level 1 preparation candidates. For a more detailed understanding, you can watch the webinar video on this topic. The link for the webinar video on this topic is https://www.youtube.com/watch?v=JKBKnxM2Nj4
Forward Rate Agreements, or FRAs, are a way for a company to lock in an interest rate today, for money the company intends to lend or borrow in the future.
Instrument d’informació per als auxiliars de conversa destinats a Catalunya i gestionats pel Ministerio de Educación. El contingut es divideix en una primera part d’explicació del sistema educatiu i de l’organització d’un centre escolar. En la segona part s’exposa l’estructura del Programa i les funcions i tasques dels auxiliars. En tercer lloc s’indiquen els tràmits administratius que els auxiliars han de dur a terme i finalment es troba informació addicional amb dades i adreces d’interès.
Answer -1). Swap - A swap is a derivative in which two counter p.pdfaparnaagenciestvm
Answer :-
1). Swap :- A swap is a derivative in which two counter parties exchange cash flows of one
party\'s financial instrument for those of the other party\'s financial instrument. The benefits in
question depend on the type of financial instruments involved. For example, in the case of a
swap involving two bonds, the benefits in question can be the periodic interest (coupon)
payments associated with such bonds.
The swap agreement defines the dates when the cash flows are to be paid and the way they
areaccrued and calculated. Usually at the time when the contract is initiated, at least one of these
series of cash flows is determined by an uncertain variable such as a floating interest rate, foreign
exchange rate, equity price, or commodity price.
The cash flows are calculated over a notional principal amount. Consequently, swaps can be in
cash or collateral. They can be used to hedge certain risks such as interest rate risk, or to
speculate on changes in the expected direction of underlying prices. Swaps are private
agreements between two parties to exchange cash flows in the future according to a pre-arranged
formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps
are interest rate swaps and currency swaps.
A). Interest rate swaps: -However, this may lead to a company borrowing fixed when it wants
floating or borrowing floating when it wants fixed. This is where a swap comes in. A swap has
the effect of transforming a fixed rate loan into a floating rate loan or vice versa.
B). Currency swaps: - A currency swap involves exchanging principal and fixed rate interest
payments on a loan in one currency for principal and fixed rate interest payments on an equal
loan in another currency.
2). Options :- An option is a contract which gives the buyer (the owner or holder of the option)
the right, but not the obligation, to buy or sell an underlying asset or instrument at a specific
strike price on a specified date, depending on the form of the option.The strike price may be set
by reference to the spot price (market price) of the underlying security or commodity on the day
an option is taken out, or it may be fixed at a discount in a premium. The seller has the
corresponding obligation to fulfill the transaction—to sell or buy—if the buyer (owner)
\"exercises\" the option.
Options are of two types – Calls and Puts. Calls give the buyer the right but not the obligation to
buy a given quantity of the underlying asset, at a given price on or before a given future date.
Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying
asset at a given price on or before a given date.
In basic terms, the value of an option is commonly decomposed into two parts :-
a). The first part is the intrinsic value, which is defined as the difference between the market
value of the underlying and the strike price of the given option.
b). The second part is the time value, which depends on a set.
2. The long position holder is the buyer of the contract and
the short position holder is the seller of the contract.
The long position will take the delivery of the asset and
pay the seller of the asset the contract value, while the
seller is obligated to deliver the asset versus the cash value
of the contract at the origination date of this transaction.
When it comes to default, both parties are at risk because
typically no cash is exchanged at the beginning of the
transaction. However, some transactions do require that
one or both sides put up some form of collateral to protect
them from the defaulted party.
3. Forward Rate Agreement (FRA) is a forward contract
between two parties to exchange an interest rate
differential on a notional principal amount at a given
future date in which one party, the “Long”, agrees to
pay a fixed interest payment at a quoted contract rate
and receive a floating interest payment at a reference
rate (Underlying rate).
OR
FRA’s are for agreements dealing with interest rates, the
parties to the contract will exchange a fixed rate for a
variable one. The party paying the fixed rate is usually
referred to as the borrower, while the party receiving
the fixed rate is referred to as the lender.
4. The notional value of a forward currency contract is
the underlying amount that an investor has contracted
to buy and sell (when an investor contracts to buy one
currency, they also contract to sell another currency).
For a basic example,
Assume Company A enters into an FRA with Company
B in which Company A will receive a fixed rate of 5%
for one year on a principal of $1 million in three years.
In return, Company B will receive the one-year LIBOR
rate, determined in three years' time, on the principal
amount. The agreement will be settled in cash in three
years.
5. If, after three years' time, the LIBOR is at 5.5%, the
settlement to the agreement will require that
Company A pay Company B. This is because the
LIBOR is higher than the fixed rate. Mathematically,
$1 million at 5% generates $50,000 of interest for
Company A while $1 million at 5.5% generates
$55,000 in interest for Company B. Ignoring present
values, the net difference between the two amounts
is $5,000, which is paid to Company B.
6. Characteristics :
A forward contract of interest rate.
One party makes a fixed interest payment.
The other party makes an interest payment based on a
referenced rate at the time of contract expiration.
The underlying is an interest rate.
Payments are based on the difference between the
contract rate and the reference rate (e.g., LIBOR, (London
Interbank Offered Rate), EURIBOR, (Euro Interbank
Offered Rate)..…).
7. Swap
• A financial swap is a contract between two individuals,
called counterparties, to exchange a series of cash
payment.
Two parties exchange a pair of currencies for a certain
length of time and agree to reverse the transaction at a
later date
8. The swap contract specifies:
The interest rate to each cash payment.
Time table for payments
The currency to each cash payment.
provision to cover the counterparty risk
Some elements about swap
First Swap : in 1981
In 2001 :
The whole size of the swap market is close to 48,000
million US dollars.
9. Interest rate swap
Characteristics:
Two counterparties : A and B
A agrees to make fixed payments to B.
The size of each payment : “pre - specified” fixed rate on a
notional principal.
B agrees to make floating rate payments to A.
The size of each payment : floating rate on the same notional
principal for the same period.
Payments are made in the same currencies.
Payments are netted
10. Currency Swap
Definition :
A currency swap is an agreement between two
parties to exchange a given amount of one currency
for another or a stream of one currency for a stream
of another
11. Commodity Swap
One counterparty : payments at a fixed price per unit for a
notional quantity of some commodity.
Other counterparty : payments a floating price per unit for a
notional quantity of some commodity.
Floating price : usually defined as an average price.
12. Equity Swap
One counterparty: payments at a fixed price for a notional
principle for a fixed period of time.
Other counterparty: payments a floating rate based on the
some total (dividend and gain in capital) index return.
13. Future
Future are contracts for exchanging currencies in the
future at a predetermined exchange rate .
In this respect they are similar to forward contracts
.But futures are standardized contracts with
standard contract sizes and maturity dates .
14. Options
A currency option contract is a derivative
instrument .It is a contract that gives the buyer of
the option the right,but not the obligation ,to buy
or sell a particular currency at a pre-agreed
exchange rate,known as the strike rate, within a
specified period.
The option that gives the right to buy a particular
currency is referred to as call option
The option giving the right to sell a particular
currency is referred to as put option.