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The payer of the fixed interest rate is also known as the borrower or the buyer, whilst the receiver of the fixed interest rate is the lender or the seller.


PAYOFF FORMULA

The netted payment made at the termination date is:


  • \left( rac{(Reference Rate-Fixed Rate) --- \alpha }{ Reference Rate --- \alpha +1} ight)



  • The Fixed Rate is the rate at which the contract is agreed.

  • The Reference Rate is typically Euribor or LIBOR .

  • \alpha is the ''day count fraction'', i.e. the portion of a year over which the rates are calculated, using the Day Count Convention used in the money markets in the underlying currency. For EUR and USD this is the number of days divided by 360, for GBP it is the number of days divided by 365 days.

  • The Fixed Rate and Reference Rate are rates that should accrue over a period starting on the termination date, and then paid at the end of the period. However, as the payment is already known at the beginning of the period, it is also paid at the beginning. This is why the discount factor is used in the denominator.



FRAS NOTATION

FRA Descriptive Notation and Interpretation




SEE ALSO




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