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Forward Rate Agreement

Product Characteristics

  1. It refers to both parties agree on an interest rate for a certain period in the future, and upon maturity, both transaction parties do not require the settlement of principle, but only to settle the interest difference by multiplying the difference between the market benchmark interest rate pre-defined and the interest rate agreed with the agreed notional amount.

Use Timing

  1. Hedging application
    1. For individuals requiring fund: Increase of interest rate will increase the fund cost; therefore, FRA can be purchased for the purpose of hedging. If the interest rate actually increases, the profit from FRA trading can be used to offset the increase of the financing cost, such that the fund total cost can be locked at a relatively lower than current interest rate. 
    2.  For fund providers: Decrease of interest rate will reduce the fund income; therefore, FRA can be sold for hedging. If the interest rate actually decreases, the profit from FRA trading can be used to offset the reduce of the fund income, such that the fund total income can be locked at a relatively higher than current interest rate.  
  2. Investment application
    FRA can also be used as an investment tool: When the interest rate is expected to decrease, FRA can be sold; when the interest rate is expected to increase, FRA can be purchased.