When I go into a forward rate agreement for an underlying loan and I receive interest savings from the FRA, what happens is that I pay the actual amount for the loan but the gain I received from the FRA covers the cost of the loan and exceeds.
Is that correct?
I’m not sure that I understand your question.
If you enter into, say, a 4 × 7 FRA, then 4 months from today you look at the existing 3-month LIBOR rate, net that against the fixed rate on the FRA, discount the net payment 3 months, and pay or receive that discounted amount.
I think you’re asking if the FRA settles in cash, so that you can offset the cost of the loan due to the change in interest rate. I do believe that’s how the FRA works.
Both of your answers are really helpful, thanks!
My pleasure.