In other words, a Discount Rate Agreement (FRA) is a short-term, tailored and agreed-upon financial futures contract. A transaction fra is a contract between two parties for the exchange of payments on a deposit, the notional amount, which must be determined later on the basis of a short-term interest rate called the benchmark rate over a predetermined period. FRA transactions are introduced as a hedge against changes in interest rates. The buyer of the contract blocks the interest rate to protect against an interest rate hike, while the seller protects against a possible drop in interest rates. At maturity, no funds exchange hands; On the contrary, the difference between the contractual interest rate and the market interest rate is exchanged. The purchaser of the contract is paid when the published reference rate is higher than the fixed rate agreed by contract and the buyer pays the seller if the published reference rate is lower than the fixed rate agreed by contract. A company trying to guard against a possible interest rate hike would buy FRAs, while a company seeking interest coverage against a possible interest rate cut would sell FRAs. Interest rate swaps (IRS) are often considered a number of NAPs, but this view is technically incorrect due to the diversity of methods for calculating cash payments, resulting in very small price differentials. The counting of an FRA contract is made in advance, i.e. on the date the contract is counted. The amount of compensation is calculated by cancelling the difference in interest rates payable between the due date and the settlement date, using the interest rate of the market in question. An OTC rate agreement (FRA) is an over-the-counter contract for a cash payment at maturity, based on a market interest rate (cash) and a predetermined forward interest rate. The contract defines how the reference rate should be determined (sometimes referred to as the reference rate).
When the spot rate is higher than the agreed rate, the seller agrees to pay the buyer the difference between the predetermined forward rate and the cash rate at maturity multiplied by a fictitious capital amount. If the spot rate is lower than the futures price, the buyer pays the seller. The fictitious principle, which is not exchanged, constitutes a deposit in euros with a maturity or a certain tenor that begins on the day of the maturation of the FRA.