4
FRAs
The previous chapter introduced and explained the concept of forward rates. This chapter looks at one of the earliest financial engineering instruments, the FRA. The FRA, originating from the money markets, offers a flexible tool for hedging against or speculating on the movements of a specific interest rate.
4.1 What is an FRA?
The initials FRA stand for forward rate agreement. In essence, an FRA is like a forward-forward loan granted at a fixed interest rate, but without the actual lending commitment. Removing the flows of principal from the FRA takes the instrument off the balance sheet, ...
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