Use

An IRG is for an option on a Forward Rate Agreement (FRA). This option enables you to hedge against negative interest rate trends.

The seller of the option guarantees the buyer a short-term forward interest rate agreed in advance (strike price). The two variants of this option are call-on-FRA and put-on-FRA, which define the buyer’s right to either buy or sell a FRA.

Activities

The premium is calculated according to generally accepted conventions. To enter the transaction, you enter both the underlying instrument (that is, the underlying FRA with its structural characteristics) and the option together with the corresponding premium. Initially, the cash flow only displays the option premium that is paid or received. On the due date, the option is either exercised or expires, rendering it worthless. If the option is exercised, the cash flow displays the calculated settlement payment.