August 2004
Beginner to intermediate
248 pages
8h 6m
English
book
Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options
by Andrew M. Chisholm
Content preview from Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and OptionsBecome an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
O’Reilly covers everything we've got, with content to help us build a world-class technology community, upgrade the capabilities and competencies of our teams, and improve overall team performance as well as their engagement.I wanted to learn C and C++, but it didn't click for me until I picked up an O'Reilly book. When I went on the O’Reilly platform, I was astonished to find all the books there, plus live events and sandboxes so you could play around with the technology.I’ve been on the O’Reilly platform for more than eight years. I use a couple of learning platforms, but I'm on O'Reilly more than anybody else. When you're there, you start learning. I'm never disappointed.I'm always learning. So when I got on to O'Reilly, I was like a kid in a candy store. There are playlists. There are answers. There's on-demand training. It's worth its weight in gold, in terms of what it allows me to do.
Chapter 3. Forward Rate Agreements
INTRODUCTION
A forward rate agreement (FRA) is a bilateral contract fixing the rate of interest that will apply to a notional principal sum of money for an agreed future time period. In fact the notional principal never changes hands. It is simply used to calculate the compensation or settlement amount that is paid by one party to the other. One side is said to be the buyer and the other the seller.
Buyer. The buyer of the FRA is compensated in cash by the seller if the reference or benchmark interest rate for the contract period turns out to be above that agreed in the contract.
Seller. The seller of the FRA contract is compensated by the buyer if the benchmark interest rate turns out to be below the contractual rate.
The natural buyers of FRAs are corporate borrowers who wish to hedge against rising interest rates. Money market investors who wish to protect against declining interest rates are natural sellers of FRAs. An FRA is a derivative instrument because its value is derived from spot or cash market interest rates, that is, the interest rates on deposits and loans starting now rather than in the future.
FRAs are very similar to the short interest rate futures contracts traded on the exchanges (Chapter 5) except that FRAs are over-the-counter (OTC) transactions. As we have seen, an OTC derivative contract is a legal and binding agreement made directly between two parties. As such it cannot be freely traded and carries a counterparty risk – the ...
Become an O’Reilly member and get unlimited access to this title plus top books and audiobooks from O’Reilly and nearly 200 top publishers, thousands of courses curated by job role, 150+ live events each month,
and much more.
Read now
Unlock full access
More than 5,000 organizations count on O’Reilly
O’Reilly covers everything we've got, with content to help us build a world-class technology community, upgrade the capabilities and competencies of our teams, and improve overall team performance as well as their engagement.Julian F.
I wanted to learn C and C++, but it didn't click for me until I picked up an O'Reilly book. When I went on the O’Reilly platform, I was astonished to find all the books there, plus live events and sandboxes so you could play around with the technology.Addison B.
I’ve been on the O’Reilly platform for more than eight years. I use a couple of learning platforms, but I'm on O'Reilly more than anybody else. When you're there, you start learning. I'm never disappointed.Amir M.
I'm always learning. So when I got on to O'Reilly, I was like a kid in a candy store. There are playlists. There are answers. There's on-demand training. It's worth its weight in gold, in terms of what it allows me to do.