September 2010
Beginner to intermediate
288 pages
8h 43m
English
book
Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options, Second Edition
by Andrew M. Chisholm
Content preview from Derivatives Demystified: A Step-by-Step Guide to Forwards, Futures, Swaps and Options, Second Edition
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,
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.
3
Forward Rate Agreements
INTRODUCTION
A forward rate agreement (FRA) is a bilateral contract fixing the rate of interest applying to a notional principal amount of money for an agreed future time period. One party is said to be the FRA buyer and the other the seller. However the notional principal never changes hands. It is simply used to calculate the settlement sum.
• FRA Buyer. The buyer is paid a settlement sum by the seller if the reference or benchmark interest rate for the contract period turns out to be above that agreed in the contract.
• FRA Seller. The seller is paid a settlement sum by the buyer if the benchmark interest rate turns out to be below the contractual rate.
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. This is illustrated in this chapter.
Users of FRAs
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.
FRAs are similar to exchange-traded interest rate futures contracts (Chapter 5) except that FRAs are over-the-counter (OTC) deals. As we have seen, an OTC derivative is a legal and binding agreement made directly between two parties. It cannot be freely traded and carries a potential counterparty risk - the risk that the other party might fail to fulfil its ...
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.