How does FRA has 0 value at initiation? I thought only forward and future contracts have 0 value at initiation
An off-market forward rate agreement (FRA): A) provides a series of payments. B) has a positive value at contract initiation. C) cannot be priced with market rates. Your answer: B was correct! An off-market FRA has a contract rate that differs from the zero-value rate at the inception of the contract; by definition, it has a positive value to one of the parties to the FRA.
By design: the fixed rate is set to the implied forward rate for the loan term starting at the loan initiation. Thus, the value at inception is zero. (If it weren’t there would be an arbitrge opportunity.)
By definition, an off-market FRA has a fixed rate that is different from that of a normal (zero-value) FRA. They got it right.
Hmm ok thx. The reason why swap value isn’t 0 at initiation is because the rate each party paying is different? So they don’t get canceled out? I think I need some sleep…
You’re welcome.
That’s correct.
Correct again.
I’ll take your word for it.
Wait… Why does the off mkt FRA have a POSITIVE value at initiation??? Couldn’t it be negative as well?
Positive to one party (either the long or the short), negative to the other (either the short or the long, respectively). Not necessarily positive to the long, say.
As _ you _ wrote: