FX

Forward Rate Agreements (FRAs) are bilateral OTC agreements

• To fix FX rates for a future period

• For immediate exchange of one currency for another

• To fix Libor for a future period on a notional amount

• To exchange currencies at a date in the future

Forward FX rates are calculated from

• Investor predictions of currency movements

• FX rates set by central banks

• Interest rates set by central banks

• Spot rates and interest rates prevailing in each country

Spot FX is an exchange of one currency for another that settles

• Immediately

• At an agreed date in the future

• Normally 2 days after trade date

• Normally the next business day after trade date

Forward FX rates are calculated from

• Investor predictions of currency movements

• FX rates set by central banks

• Interest rates set by central banks

• Spot rates and interest rates prevailing in each country

Interest rate swaps are

• An exchange of fixed for floating cash flows over the life of the swap

• Calculated from spot rates and interest rates prevailing in each country

• Derivatives that limit users’ exposure to interest rate rises and falls

• Bilateral OTC agreements to fix Libor for a future period on a notional amount

An interest rate cap is similar to

• a call option on interest rate

• a put option on interest rate

An interest rate floor is similar to

• A call option on interest rate

• A put option on interest rate

Interest rate collars are suitable for buyers due to

• Protection from interest rate rise at zero cost

• Protection from interest rate fall at zero cost

• high cost of hedging