FRA Settlement (Forward Rate Agreement)
Computes the settlement amount of an FRA (Forward Rate Agreement), the contract that locks in today an interest rate for a future period. At fixing, the contracted rate is compared with the market reference rate, and the difference is paid at the start of the period — which is why it's discounted: N·(L − R)·(d/B)/(1 + L·d/B). When the market rate exceeds the contracted one, the party who locked in gains. It's used to hedge loans and deposits against rate moves. Enter the notional, the contracted rate, the reference rate, the days in the period and the day-count basis.
Result
—
FRA Settlement (Forward Rate Agreement)
Computes the settlement amount of an FRA (Forward Rate Agreement), the contract that locks in today an interest rate for a future period. At fixing, the contracted rate is compared with the market reference rate, and the difference is paid at the start of the period — which is why it's discounted: N·(L − R)·(d/B)/(1 + L·d/B). When the market rate exceeds the contracted one, the party who locked in gains. It's used to hedge loans and deposits against rate moves. Enter the notional, the contracted rate, the reference rate, the days in the period and the day-count basis.
Locking in tomorrow's interest rate today
A company that knows it'll need to borrow in three months lives with a fear: what if rates rise by then? The FRA, or Forward Rate Agreement, kills that fear. It fixes today the rate that will apply to that future period. If rates rise, the FRA pays the difference; if they fall, you pay, but either way the cost of the loan is locked in.
The technical detail many people get wrong is the discounting. The interest difference between the locked rate and the market rate refers to the end of the period, but the FRA settles at the start of it. That's why the amount is brought to present value at the reference rate: N·(L − R)·(d/B) divided by (1 + L·d/B). Forgetting that denominator inflates the payment by more than one percent.
Enter the notional, the contracted rate, the reference rate observed at fixing, the days in the period and the day-count basis (usually 360). The tool returns the settlement amount and shows who pays whom. Mind the basis: dollar and euro use 360, but sterling uses 365, and that changes the result.
Related Tools
Payer Swaption (Black Model)
Computes the premium of a payer swaption with the Black model: the right to enter an interest rate swap paying a pre-agreed fixed rate. The price is the swap's annuity multiplied by a Black formula on the forward swap rate. Swaptions are the central instrument for those managing long-term interest rate risk, like banks and insurers. Enter the forward swap rate, the strike, the volatility, the expiry, the annuity (PV01) and the notional.
Interest Rate Caplet (Black Model)
Computes the premium of a caplet with the Black model: an option that pays when a period's interest rate exceeds a cap. A full interest rate cap is a sum of caplets, one for each payment period. It's the classic protection for someone who took a floating-rate loan and wants to limit how much they can pay. The price discounts the expected payoff to the payment date. Enter the forward rate, the cap rate, the volatility, the fixing time, the accrual fraction, the discount factor and the notional.
Par Swap Rate
Computes the par swap rate from discount factors: the fixed rate that makes the interest rate swap's value zero at inception, equating the fixed and floating legs. The formula is (1 − last discount factor) divided by the sum of discount factors weighted by the period. It's a swap's market quote and the basis for marking existing positions to market. Enter the list of discount factors by payment date and the year-fraction of each period.
The results provided by this tool are for general informational and educational purposes only and do not constitute professional, financial, medical, legal, tax or accounting advice. Always confirm important decisions with a qualified professional and official sources.