As a hedging device, FRAs are similar to short-term interest rate futures (STIRs). But there are a few distinctions that set them apart. Dave wants to receive $100 in three months. How much is it going to cost him today? The price of this futures contract would be the current value of $100 in 3 months. Interest rate difference – | (settlement rate – contract rate) | × (days during the contract period/360) × Notional Value The amount of cash exchanged between the two parties for a differentiated value of an FRA calculated from the perspective of the sale of an FRA (which will mimic obtaining the fixed interest rate) is calculated as follows:[1] The trading date is the trading date when the contract is signed. The fixing date is the date on which the reference rate is verified and compared to the forward interest rate. For sterling, it is the same day as the settlement date, but for all other currencies, it is 2 working days before. If the FRA uses libor, then the LIBOR solution is the official offer of the sentence for Fixing Day. The reference price is published by the pre-established organization, which is generally proclaimed through Reuters or Bloomberg.
Most FRAs use LIBOR for the contract currency for the reference rate on the fixing date. This is a $100 swap, fixed on a 12-month float, semi-annual payments at a fixed rate of 6% and a floating leg on LIBOR. Interest Rate Swap (IRS) is a kind of swap and is therefore part of the derivatives category. Its price is derived from market interest rates. A futures agreement (FRA) is another name for a futures contract – an over-the-counter agreement that allows the buyer and seller to set the price, interest rate or exchange rate of a subsequent transaction. A Advance Rate Agreement (FRA) is a futures contract in which a party pays a fixed interest rate and obtains a variable interest rate equal to a benchmark rate (the underlying rate).