ACCA Applied Skills · Financial Management · Hedging techniques for interest rate risk
Which statement best describes a forward rate agreement (FRA)?
An FRA is a binding over-the-counter contract that fixes the interest rate on a notional loan or deposit for a future period. At settlement only the difference between the agreed rate and the market reference rate is paid, with no principal exchanged.
- AA binding contract fixing the interest rate on a notional loan or deposit for a future period, settled by a payment of the difference between the agreed and market ratesCorrect
- BA contract giving the holder the right but not the obligation to borrow at a fixed rate
- CAn exchange of fixed-rate interest payments for floating-rate payments over several years
- DA standardised exchange-traded contract requiring margin payments and delivery of the underlying loan
Explanation
An FRA is an over-the-counter agreement fixing a rate for a future notional loan or deposit. No principal is exchanged; only the interest difference between the agreed rate and the reference rate is settled. The option description relates to an interest rate option, and the multi-year exchange describes a swap.
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