Forward Rate Agreement
Under Forward Rate Agreements (FRAs), our bank helps protect you from future adverse movements in interest rates. A FRA constitutes a money market instrument that allows you to hedge against the risks involved in any changes in deposit and lending rates, as it fixes the interest rate for a specified period in the future. For example, if you anticipate that interest rates may go up in the next few months, you can protect the cost of your borrowing by purchasing the relevant amount of FRA contracts for a specific future period. If rates do rise the losses you would have incurred will be offset through contracts settlement and covered by the counterparty (the seller of the contracts).
How do you benefit:
hedging against adverse interest rate changes both for the entity depositing assets and for the one taking a loan,
there is a range of contract terms to choose from, i.e., 1x4, 2x5, 3x6, 3x9, 6x9 or 6x12 (the designation 1x4, for example, means hedging of the interest rate under a contract that begins in one month's time and remains in force for another three months).
