Foward Rate Lecture - Debt Instruments and Markets...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Debt Instruments and Markets Professor Carpenter Forward Rate Agreements 1 Forward Rate Agreement (FRA) Forward Contract Valuation FRAs and Swaps Veronesi, pp.162-167
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Debt Instruments and Markets Professor Carpenter Forward Rate Agreements 2 A forward rate agreement (FRA) is a contract between two counterparties to exchange a fixed interest payment for a floating interest payment on a single date. Large, liquid, over-the counter market. $47 trillion notional amount outstanding in 2009. Most contracts are linked to LIBOR or Eurobor. Contracts can be customized. To take a simple example, consider a contract on a 0.5-year rate. The fixed receiver pays interest at some maturity date t at the floating rate t -0.5 r t in exchange for interest at fixed rate f , on an agreed notional amount N. There would be a single cash flow at time t . The fixed payer would pay the fixed receiver N x ( f - t -0.5 r t )/2 Actually, in practice, the payoff is settled when it becomes known at time t -0.5 at [ N x ( f - t -0.5 r t )/2]/(1+ t -0.5 r t /2) but this does not change the value.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern