FRA (SAP Library - Derivatives)

FRA

Use

Forward Rate Agreements are financial instruments that buyers and sellers use today to specify a fixed interest rate for a future period.

A FRA is based on a fictitious money market transaction with a capital amount which merely serves as a calculation factor. Buyers of FRAs cover themselves against rising interest rates, while sellers of FRAs cover themselves against falling interest rates. You enter a FRA in the system according to your requirements in a format that reflects the general trading conventions.

Example:

Forward Rate Agreement 3:9

Base amount 10 million DEM Þ 10m

Interest rate (FRA rate) 5% Þ in 3 months for 6 months

Reference interest rate LIBOR 6 months

Interest comparison in 3 months, hedging period 6 months
6M LIBOR in 3 months = 6% Þ clearing payment to the purchaser

The "3 on 9" FRA has a contract period of 6 months with the start of the hedge period in 3 months. At this point, the contract is also settled and paid out.

If the LIBOR rate were lower than the FRA rate, the purchaser would have to make the clearing payment.

Features

Both parties of the contract are free to choose their own transaction data for the term and interest structure.

The FRA record reflects the forward yield curve.

When you define the product type in Customizing, you can create an Australian FRA in addition to the standard FRA. The two FRAs differ in the way in which the Settlement payment is calculated.

Calculating the settlement payment for the Standard FRA:

The reference interest rate is fixed on the fixing date
The interest amount is calculated automatically on the basis of the difference between the FRA record and the reference interest rate
The interest amount is discounted automatically using the reference interest rate at the start of the hedge period
The settlement payment is displayed as the incoming or outgoing payment in the cash flow.

Calculating the settlement payment for the Australian FRA:

The reference interest rate is fixed on the fixing date
The interest amount is calculated automatically both on the basis of the FRA record and the reference interest rate
The interest amount is discounted automatically at the start of the hedge period each time with the interest rate used for calculating the interest amount
The settlement payment is calculated as the difference between the discount amounts and displayed as an incoming or outgoing payment.

Activities

On the initial screen, enter the following basic data for the transaction:

Company code
Product type
Transaction type
Current transaction activity (order or contract)
Business Partner

Choose Enter to go to the basic data screen for the transaction. On the tab page Structure enter the actual transaction data for the FRA.

The fields listed below are either required or optional fields:

Term area:

Start of lead time
Start of hedge period (in the example: ++3)
End of hedge period (in the example: ++9)

Interest structure area:

Base amount
Interest rate
Interest calculation method
Reference interest rate (in example: LIB_6)
Fixing

Business calendar area:

Here, you enter the relevant factory calendar for shifting the working day (such as USA).

Both parties of the contract can choose their own amounts, currencies, and terms; the interest rate reflects the forward yield curve.

You can specify in Customizing whether you want the name of the trader to be displayed automatically. You can also enter additional information, such as the business partner or a reference for the business partner.

You also have the option of branching to the entry screens for general transaction management ( Administration, Other Flows, Payment Details. Cash Flow, Memos and Status). You can use the tab pages to navigate between the different screens.

To save the basic data, choose FRA ® Save.

For more information about options on FRAs, see Interest Rate Guarantee (IRG).

For general explanations on terms, see Basic Data.