ok guys I just want to clarify in a Forward Rate Agreement, does … the buyer ALWAYS pay a fixed rate, while the seller agrees to pay a variable rate on the stated notional principal? Or can buyer pay the floating rate in exchange for a fixed rate? thanks Rou
buyer pays fixed seller pays float if you want to pay float and receive fix, you will be the seller
While we are talking on the subject of FRA. Can someone explain why the Returns from the difference of fixed and floating rate is discounted by the underlying underlying rate at expiration.
FRA is betting on future series of cash flow let’s say betting on the a 6-month LIBOR 3 months later after 3 months, the 6-month rate is known however the cash flow will be received 6 months later so the difference of cash flow must be discounted back to the day when 6-month rate is known sorry for my crappy english hope that helps
2 parties in a contract one will pay the fix rate (the buyer) one will pay the variable rate (the seller) They agree on a (say) 3X9 FRA LIBOR, that is, at expiration in 3 months from the moment of entering into the contract, the buyer pays the fix rate, and the seller will pay the variable 6 months LIBOR interest on the notional principal: at contract expiration, it is determined what is the 6 months LIBOR, as if the payment would be received in 6 months. Instead of waiting 6 months for the cash, the payment is discounted to PV, at the LIBOR rate, and netted against the fix rate payment on the same notional.
heha, thx that cleared it up. So what I am basically getting from your example is that after 3 months (when the FRA expires), the 6-month rate will then be known and used to discount the returns from the LIBOR floating and fixed rate to the day after the FRA expires.
bingo
heha168 Wrote: ------------------------------------------------------- > buyer pays fixed > seller pays float > > if you want to pay float and receive fix, you will > be the seller haha makes sense! thanks