Forward Rate Agreement Replication

The party paying the fixed interest rate is designated as the borrower, while the party receiving the variable interest rate is designated as the lender. The agreement on the rate in the future could have a maximum duration of five years. A) Put and a brief LIBOR call with an exercise rate of 6% and two years before expiration. B) to call LIBOR with an exercise rate of 6% and eighteen months until its expiry in Denklass. C) Call and a short put on LIBOR with a strike rate of 6% and two years until expiration. Future Interest Rate Agreements (FRA) are over-the-counter contracts between parties that set the interest rate to be paid on an agreed date in the future. A FRA is an agreement to exchange an interest rate bond on a nominal amount. Many banks and large corporations will use FRAs to hedge future interest rate or foreign exchange risks. The buyer insures against the risk of rising interest rates, while the seller hedges against the risk of falling interest rates. Other parties who use interest rate agreements in the future are speculators who only want to make bets on future changes in the direction of interest rates. [2] Development exchange operations in the 1980s offered organizations an alternative to FRA for hedging and speculation. .

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