Forward rate agreements (FRAs) - part 2

In this lesson

1. 0:00 Forward Rate Agreements: Foolproof calculation steps
2. 0:25 Rule one: Match FRA to transaction dates
3. 0:30 Rule two: Borrowers buy, savers sell
4. 0:57 Rule three: Bank always wins on rates
5. 1:04 Rule four: Calculate underlying transaction interest
6. 1:32 Rule five: Calculate FRA gain or loss
7. 1:55 Rule six: Combine for net position
8. 3:07 Worked example: Selecting correct FRA
9. 3:58 Worked example: Applying all six steps
10. 7:08 Converting to annual percentage rate
11. 8:05 Summary: FRA calculation methodology

About this lesson

You'll work through a practical example involving a deposit transaction, learning how to select the correct FRA, decide whether to buy or sell, apply the appropriate rate, and calculate your net hedging position. By following the foolproof calculation process demonstrated here, you'll be able to handle any FRA scenario in your exam with confidence and accuracy. The video breaks down the five core steps for FRA success: identifying the correct start and finish dates, determining whether to buy or sell based on whether you're a borrower or saver, selecting the rate that favours the bank, calculating interest on your underlying transaction, and computing your gain or loss on the FRA itself. You'll see how these components combine to show your final net position — the actual outcome of your hedge. The worked example uses a $20 million deposit scenario with multiple FRA options, showing you exactly how to time-apportion percentages and scale gains into monetary values. This methodical approach works every time, so practising these steps will build your exam technique and help you handle FRA questions quickly and accurately.

Duration: 9m