elearning > Forward interest rates

Related Documents

Market Guides > Forward rate agreements

15th September 2009

Forward rate agreements (FRAs) are contracts for difference. They are traded in the over-the-counter (bilateral or non-exchange) market. They allow the two parties involved to hedge or speculate on interest rates in the future. Perhaps the easiest way to understand a FRA is to break it down into a loan and deposit. Let's try.

Market Guides > Spot & forward foreign exchange

12th October 2009

Introduction Foreign exchange is defined as "a claim to a foreign currency payable abroad and may be funds held, bills or cheques". A foreign exchange transaction is, "a contract agreed today between two parties to trade an agreed amount of one currency for an agreed amount of another currency on a future date". When you travel you may be familiar with buying currency at the airport. Because the sums involved are small and paper money is exchanged the differences between buying and selling prices can be wide. You may also be unfortunate enough to pay a dealing fee. Banks, corporates and speculators deal in the professional market. Trades are transacted across electronic platforms and each trade can run into millions of dollars. As a consequence dealing spreads are very narrow and the money is exchanged by credits and debits to bank accounts. Let's find out about the spot and forward markets and the risks involved.

Net interest income and low rates

25th March 2017

You may have noticed that bank earnings are sensitive to interest rates. As rates fall the net interest income (NII) they earn falls too. Why is this?

Interest Rate Options

12th August 2014

Interest rate caps are a string of options on forward starting Libor. The individual option is called a “caplet” with the combined sum of each caplet’s value giving the cap price or premium. Forward interest rates are calculated from the par yield curve. To help understand them a simple example helps. If you borrow money for six months and deposit it for three months there is a rate of interest that you need to receive on your deposit between month three and month six in order to give you sufficient cash to repay your initial borrowing with interest. This is the breakeven or forward rate:

Non Deliverable Forwards

18th August 2011

Non deliverable forward (NDF) What is a non deliverable forward? It is a forward foreign exchange contract but instead of there being physical delivery at maturity of the currency pair the counterparties settle the transaction by a single net payment in the convertible currency. This payment represents the profit or loss on the trade. NDFs are used when a currency is not freely convertible. That is where the authorities only permit the exchange of the domestic currency through the central bank at an official spot rate. The proceeds of which may then be taken out of the country. If an exporter invoices in a non-convertible currency the invoice amount will eventually need to be sold (normally for USD) through official channels. As a result of the fluctuation of the spot rate the exporter may receive more or less USD than expected and is therefore subject to currency risk. This risk can be hedged with a NDF. Let's look at an example:

elearning > Spot & forward foreign exchange

Learn about the following: How the spot market works. What the spot price is. What happens when you do a deal. How the forward rate is calculated. How dealers make money. Why customers are important.