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Derivatives Desk
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Interest Rate Swaps
FRA
Foreign Currency Swaps
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Derivatives Desk
Long-dated Forward Cover

FRA is an agreement between two parties that gives one a guaranteed future rate of interest to cover a specified sum of money over a specified period of time in the future. Alternatively, it gives one party a guaranteed future rate of interest on his investments over a specified period of time in the future.

Example:
A Company proposes to borrow USD 10 million three months hence for a period of 6 months. He arranges for this facility with a bank today at 1 percent over the 6 month Libor prevailing on the date of drawdown of the loan. Since the reference rate is a floating rate that would prevail at a future date the company is not able to determine it's interest cost today. If it wishes to get over this uncertainty, it could buy a FRA (3 v/s 9). This would essentially be a contract to receive interest from the FRA seller at a rate at which the company will eventually be required to pay on its loan (but without the spread), in exchange for a fixed rate determined today.

In the above example, the buyer of the FRA has borrowed effectively at a rate at which it concludes the FRA plus the spread of 1 percent, since the FRA seller will compensate/be compensated for the difference in rate between the FRA rate and the relevant spot Libor rate determined three months hence.
 
Dealing and Quotations:
Deal date or the transactions date, is the date when the  transaction is initiated.
Contract period is the period from the settlement date to the maturity date.
Settlement date is two days prior to the beginning of the contract period of the liability or the asset and the date on which the settlement sum is paid.
Maturity date is date at which the contract ends.
Settlement sum is the amount of money either paid or received in compensation as per the terms of the FRA, on the settlement date.
Fixing Date is the date on which the reference rate of the FRA is decided. This date is generally 2 working dates before the settlement date, however the same can be decided mutually by both the counter-parties.

A quote of 9.75% - 10.25% against 3 month MIBOR for 3 v/s 6 FRA means that the market maker:

Agrees to pay (bid) 9.75% fixed and receive the 3 month MIBOR determined 3 months from today.
Agrees to receive (ask/offer) 10.25% fixed and pay the 3 month MIBOR determined 3 months from today.
Who can enter into FRAs?
In the case of Rupee FRAs banks, primary dealers and financial institutions are allowed to enter into FRAs for the purposes of hedging their exposure as well as for market making. Other corporate customers are allowed to enter into Rupee FRAs ONLY for the purposes of hedging the interest rate risk on an underlying asset/liability

In the case of non-Rupee FRAs all participants are allowed to enter into these transactions only for the purposes of hedging an underlying exposure.
The purchase of a FRA protects against a rise in the interest rates, where the party is to borrow in the cash markets.
The sale of a FRA protects against a fall in the interest rates, where the party is to lend in the cash markets.
 

For more details, write into us at derivatives@hdfcbank.com
and we will get back to you.
 
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