Forward rate agreements (FRAs) - part 1

In this lesson

1. 0:00 Forward rate agreements introduction
2. 0:57 Understanding interest rate risk exposure
3. 1:52 FRAs as hybrid forwards and futures
4. 3:39 How FRAs lock in fixed outcomes
5. 5:11 FRA terminology and notation explained
6. 6:34 Converting annual rates to period rates

About this lesson

You'll explore what makes FRAs different from standard forwards and futures, understand the terminology used to present them (size, duration, and rate spread), and see how they protect you whether rates rise or fall. This is essential knowledge for FM, AFM, and SBL papers, where interest rate hedging appears regularly in exam scenarios. The video walks you through the mechanics of FRAs step by step. You'll discover why FRAs are called "FRAs" rather than forwards, how they remove both upside and downside interest rate risk by creating offsetting gains and losses, and how to decode the confusing notation used by banks (for example, a 6x9 FRA starting in six months for three months). A key takeaway is understanding that the rates quoted are always annual percentages, even for shorter-term agreements, so you'll need to adjust them for your calculations. By the end of this lesson, you'll have the foundation to tackle FRA calculations with confidence. The next part builds on this by taking you through the worked examples and the step-by-step method to solve every FRA question correctly.

Duration: 7m