You can use forward rate agreements to specify a fixed interest rate today for a period in the future.

Buyers of FRAs cover themselves against rising interest rates, while sellers of FRAs cover themselves against falling interest rates.

 Example:

In 6 months time you will receive 1 million euros, which you want to invest as 3-month money. Since you are currently expecting the interest rates to fall, you arrange a FRA for 1 million euros with your bank today with a starting date in 6 months for a term of 3 months. The agreed interest rate is 5%.

If, for example, the reference interest rate on the fixing date is 4.5%, the bank has to make a settlement payment to you. If the interest rate on the fixing date is above the agreed interest rate of 5%, you have to pay the difference.

• 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 rate 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.

• The reference interest rate is fixed on the fixing date
• The interest amount is calculated automatically both on the basis of the FRA rate 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.

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

3. Enter transaction data in the fields described below: The values in parentheses relate to the example given above.

• Start of lead time (0 - today)
• Start of hedge period (++6)
• End of hedge period (++9)

• Base amount (1m euro = 1,000,000.00 euro)

• Interest rate (5.0 - the interest rate reflects the forward yield curve)

• Reference interest rate (LIB_6)
• Interest calculation method (act/360)
• Fixing (2-)

• Here, you enter the relevant business calendar for moving the date to a working day (such as USA).

4. 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.
5. You can branch to the entry screens for general transaction management functions. You can use the following tab pages to navigate between the different screens.