Forward Rate Agreements

Forward rate agreements provide an attractive way to quickly alter cash profiles

By Virginia Franco, Freelance Writer

Forward rate agreements (FRAs) are flexible loans that can be structured to mature on any date. Unlike traditional loans, there is no principal and the loan is settled at the established maturity date. Lenders make a profit from the difference between the agreed rate and the settlement rate at maturity. For example, a 3×9 FRA is a three-month forward on a six-month loan. The borrower begins payments in three months and will pay the balance in nine months.

FRAs are a viable option for cash managers or investors who want to alter their interest rate or cash flow profile. They should not be entered into without first researching forward rate agreements information or seeking forward rate agreements advice. It is also advisable to seek help with forward rate agreements from informational websites or a forward rate agreements consultant. The bottom line is that it's important to receive some rudimentary forward rate agreements training before entering into an FRA, and asking yourself the three questions below is a great place to start:

1. Do lenders maintain minimum FRA transaction amounts?

2. How are forward rate agreements payments calculated?

3. How can you learn more about how FRAs might benefit your business?

Ask the lender if there are minimum transaction amounts on forward rate agreements

It is important to read the fine print where FRAs are concerned. Many, if not most, lenders place restrictions on minimum transaction amounts. Be sure to ask this of a lender before agreeing to the terms of any forward rate agreement.
Try: St. George Bank states on its FAQ page that its minimum FRA transaction amount is a million dollars. CSOB's minimum amount for an FRA transaction is the equivalent of 10 million euros.

Calculate a rough estimate of forward rate agreements payments

Forward rate agreements are generally calculated in Euros. The London Interbank Offer Rate (LIBOR) is the most common rate for borrowing or lending where FRAs are concerned and FRAs are primarily conducted by overseas lenders.
Try: Ciberconta's and Montegodata's FRA information page includes a "calculator" button which, once pressed, provides you with a screen from which to calculate estimated payments.

Seek forward rate agreements advice from a forward rate agreements expert

Seeking the services of a consultant or third-party expert is a great way to get advice regarding arranging an FRA where the terms are in your best interest.
Try: Allen & Overy's website claims it represents more than 800 corporate and financial institution participants in the financial markets. They have expertise in world-wide finance issues, FRAs being but a small part. Allied Irish Bank's (AIB) website details its FRA expertise and summarizes how it can arrange forward rate agreements between you and AIB as well as other lenders.

If the details around forward rate agreements information still seems a bit confusing, consider reading a detailed book on the matter to help further your education on the subject.

Forward Rate Agreements