Market Guides > Forward rate agreements

Related Documents

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:

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.

elearning > Forward interest rates

Learn about the following: What forward interest rates are and how they are calculated . How forward rate agreements (FRAs) work. The terminology associated with FRAs. How FRAs settle. How FRAs are used for trading and hedging.

elearning > Repurchase agreements (repo)

Learn about the following: How repo works. The terms used in repo transactions. The repo rate and why it changes. The risks of doing repo. How some risks can be reduced. How repo trades can be used.

Floating rate notes

4th March 2010

Introduction A bond is a long term debt obligation. It is sold by the borrower who is called the "issuer" in order to borrow money for the medium and long term. Typically a bond will have a maturity of between 2 and 20 years. The issuer can be a bank, company or government institution. A bond normally has a known maturity or redemption date and during its life pays the investor interest. The interest payments are called "coupons". Bond investors rank prior to equity holders in liquidation but are subordinate to secured lenders. From an issuer's perspective the coupons are usually tax deductible (unlike dividend payments on equity). Bond markets provide investors with variety. One of the most frequently issued bonds is called a floating rate note.

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: