Quick FRA ?

[gameday0]

Who pays who in an FRA. If I am long the agreement and I bought it from a banker who pays who if interest rates rise or fall? Please use quick example!

 

[heha168]

buyer = long = pay fixed, receive float
seller = short = pay float, receive fixed

buyer wins when float rate up
seller wins when float rate down

 

[gameday0]

so why would I go long an FRA? If I think interest rates are going to rise, why would I just wait and then invest my funds at that rate?

 

[heha168]

You don't need to take the whole money out of your pocket.

 

[naroracalusa]

Think FRA in this way:

Say you are currently having a liability/debt where you pay floating rate. Now you expect that interest rate is gonna go up.

So you take an FRA where you pay fixed and receive floating. So as the interest goes up you gain on this FRA.

This gain in the FRA gives you an effective hedge against you interest liability on your earlier liability/debt.

Just an example, not that this is the only situation when one would go for a FRA.

 

[daj224]

naroracalusa Wrote:
-------------------------------------------------------
> Think FRA in this way:
>
> Say you are currently having a liability/debt
> where you pay floating rate. Now you expect that
> interest rate is gonna go up.
>
> So you take an FRA where you pay fixed and receive
> floating. So as the interest goes up you gain on
> this FRA.
>
> This gain in the FRA gives you an effective hedge
> against you interest liability on your earlier
> liability/debt.
>
> Just an example, not that this is the only
> situation when one would go for a FRA.


EXCELLENT EXAMPLE, CLARIFYING.

 

[Grimer]

In the long for an FRA, you make an agreement to borrow at a fixed rate sometime in the future... when you borrow you want that rate to be lower, so if rates rise, say from 5% (your agreed upon price to borrow) to 6%, you can borrow at the 5% and you win!
The notional amount doesn't actually change hands.