1. Forward rate agreement

2.  The long position holder is the buyer of the contract and
the short position holder is the seller of the contract.
 The long position will take the delivery of the asset and
pay the seller of the asset the contract value, while the
seller is obligated to deliver the asset versus the cash value
of the contract at the origination date of this transaction.
 When it comes to default, both parties are at risk because
typically no cash is exchanged at the beginning of the
transaction. However, some transactions do require that
one or both sides put up some form of collateral to protect
them from the defaulted party.

3.  Forward Rate Agreement (FRA) is a forward contract
between two parties to exchange an interest rate
differential on a notional principal amount at a given
future date in which one party, the “Long”, agrees to
pay a fixed interest payment at a quoted contract rate
and receive a floating interest payment at a reference
rate (Underlying rate).
OR
FRA’s are for agreements dealing with interest rates, the
parties to the contract will exchange a fixed rate for a
variable one. The party paying the fixed rate is usually
referred to as the borrower, while the party receiving
the fixed rate is referred to as the lender.

4.  The notional value of a forward currency contract is
the underlying amount that an investor has contracted
to buy and sell (when an investor contracts to buy one
currency, they also contract to sell another currency).
 For a basic example,
 Assume Company A enters into an FRA with Company
B in which Company A will receive a fixed rate of 5%
for one year on a principal of $1 million in three years.
In return, Company B will receive the one-year LIBOR
rate, determined in three years' time, on the principal
amount. The agreement will be settled in cash in three
years.

5.  If, after three years' time, the LIBOR is at 5.5%, the
settlement to the agreement will require that
Company A pay Company B. This is because the
LIBOR is higher than the fixed rate. Mathematically,
$1 million at 5% generates $50,000 of interest for
Company A while $1 million at 5.5% generates
$55,000 in interest for Company B. Ignoring present
values, the net difference between the two amounts
is $5,000, which is paid to Company B.

6.  Characteristics :
A forward contract of interest rate.
One party makes a fixed interest payment.
The other party makes an interest payment based on a
referenced rate at the time of contract expiration.
The underlying is an interest rate.
Payments are based on the difference between the
contract rate and the reference rate (e.g., LIBOR, (London
Interbank Offered Rate), EURIBOR, (Euro Interbank
Offered Rate)..…).

7. Swap
• A financial swap is a contract between two individuals,
called counterparties, to exchange a series of cash
payment.
 Two parties exchange a pair of currencies for a certain
length of time and agree to reverse the transaction at a
later date

8.  The swap contract specifies:
 The interest rate to each cash payment.
 Time table for payments
 The currency to each cash payment.
 provision to cover the counterparty risk
 Some elements about swap
 First Swap : in 1981
 In 2001 :
 The whole size of the swap market is close to 48,000
million US dollars.

9.  Interest rate swap
 Characteristics:
 Two counterparties : A and B
 A agrees to make fixed payments to B.
 The size of each payment : “pre - specified” fixed rate on a
notional principal.
 B agrees to make floating rate payments to A.
 The size of each payment : floating rate on the same notional
principal for the same period.
 Payments are made in the same currencies.
 Payments are netted

10.  Currency Swap
 Definition :
 A currency swap is an agreement between two
parties to exchange a given amount of one currency
for another or a stream of one currency for a stream
of another

11.  Commodity Swap
 One counterparty : payments at a fixed price per unit for a
notional quantity of some commodity.
 Other counterparty : payments a floating price per unit for a
notional quantity of some commodity.
 Floating price : usually defined as an average price.

12.  Equity Swap
 One counterparty: payments at a fixed price for a notional
principle for a fixed period of time.
 Other counterparty: payments a floating rate based on the
some total (dividend and gain in capital) index return.

13. Future
Future are contracts for exchanging currencies in the
future at a predetermined exchange rate .
In this respect they are similar to forward contracts
.But futures are standardized contracts with
standard contract sizes and maturity dates .

14. Options
 A currency option contract is a derivative
instrument .It is a contract that gives the buyer of
the option the right,but not the obligation ,to buy
or sell a particular currency at a pre-agreed
exchange rate,known as the strike rate, within a
specified period.
 The option that gives the right to buy a particular
currency is referred to as call option
 The option giving the right to sell a particular
currency is referred to as put option.

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