
66 Derivatives and Risk Management
4.7.2 The FRA Payment Amount
Payment is made on the settlement date, t
1
, which is the start of the loan period. e payment amount is
calculated as follows:
e forward rate according to the FRA is known and is denoted as fr (t
1
,t
2
).
On t
1
, the spot interest rate is known and hence the RR can be calculated, which is denoted by
r (t
1
,t
2
).
e RR is subtracted from the forward rate. Since these rates are stated in annual terms, the rates are
converted to the rates applicable for the loan period. For example, if the RR is 8% and the forward rate is
10%, the dierence is 2% on an annual basis. If ...