Forward interest rate agreement is a forward contract. At the time of signing the agreement, both parties agreed to make delivery on a specific date in the future according to a specific currency, amount, term and interest rate. The characteristic is that it does not involve the receipt and payment of the principal of the agreement, but only pays the discounted amount of the interest difference calculated according to the agreed interest rate and the agreed reference interest rate on the specified date, that is, the liquidation date, according to the specified period and principal amount. It has the characteristics of strong flexibility and convenient transaction. Interest rate futures refers to the interest rate futures contract transactions conducted by both parties in the centralized market through open bidding. Interest rate futures contracts have the characteristics of standardization, low cost and centralized trading, and have a good function of avoiding interest rate risks.

What is a forward interest rate agreement?

Forward interest rate agreement is a hedging method to prevent the risk of interest rate changes in international financial markets. Forward interest rate agreement hedging originated in London financial market and was quickly accepted by major financial centers in the world. With the wide application of forward interest rate agreement, 1984 formed the "forward interest rate agreement" market in London in June. Forward interest rate agreement hedging refers to that after the loan relationship is established, the borrower and the borrower sign a "forward interest rate agreement" to agree on the interest-bearing date, and compare the interest rate agreed at the time of signing with the London Interbank Offered Rate (LI-BOR) on the interest-bearing date. If the agreed interest rate is lower than LIBOR, the lender will pay the difference to the borrower. If the agreed interest rate is higher than LIBOR interest rate, the borrower will pay the lender the excess. Using forward interest rate agreement to hedge the value can not only avoid the cumbersome application of forward foreign exchange by borrowers and borrowers, but also avoid the risk of interest rate changes. However, this kind of business itself is not a lending behavior, and it does not appear on the bank's balance sheet, so it is not regulated by the government.

Interest calculation

How to pay interest on the value date can be carried out according to the following steps:

First, calculate the interest difference within the term of FRA agreement. This interest difference is based on the reference interest rate of the day (usually the reference interest rate of the settlement date is determined by using Shibor two business days before the settlement date (the reference interest rate used by ICBC, China CITIC Bank and HSBC to provide RMB FRA quotation on Bloomberg system is three-month Shibor) and the agreed interest rate. Its calculation method is the same as that of money market, which is equal to principal x spread x term (year).

Secondly, it should be noted that, according to the convention, the FRA difference is paid at the beginning of the agreement period (that is, the value date), not the last day of the agreed interest rate expiration date, so the difference paid on the value date should be discounted with reference to the interest rate.

Finally, the calculated a is positive and negative, when a >; 0, the seller of FRA pays the discounted value of interest difference to the buyer of FRA; When a man