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Forward Rate Agreement Receiver

However, unlike exchange-traded contracts, such as futures, where the clearing house used by the exchange serves as the buyer to the seller and the seller`s buyer, there is significant counterparty risk in which a party may not be able or willing to pay the liability when it is due. Unlike most futures contracts, the settlement date is at the beginning of the contract term and not at the end of the contract, since on that date the reference rate is already known, which makes it possible to determine liability. The requirement that payment be made sooner rather than later reduces credit risk for both parties. The duration of the contract is the date on which the duration of the contract ends. The FRA period is usually indicated with regard to the date of the contract: number of months before the settlement date × number of months until the expiry date. Example: 1 x 4 FRA (sometimes this notation is used: 1 v 4) indicates that there is 1 month between the date of the agreement and the date of settlement and between the date of the agreement and the end of the 4-month period. This FRA therefore has a contractual duration of 3 months. This depends on whether it is an “FRA payer” (the buyer of a contract pays at a fixed rate of the contract and receives a variable reference rate) or an “FRA recipient” (the buyer of a contract pays at a variable reference rate and obtains a fixed contractual rate). P being the nominal amount (also called the nominal amount), the reference rate (annualized), rFRA the contract rate (annualized), t a contract duration in days and T an annual basis in days (360 USD and EUR, 365 for GBP). .

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