FRA Payoff ( Long Position ) Calculator

FRA Payoff Formula:

\[ FRAp = NP \times \frac{(r_{exp} - r_{forward}) \times \frac{nur}{360}}{1 + (r_{exp} \times \frac{nur}{360})} \]

Notional Principal:

Underlying Rate at Expiration:

Forward Contract Rate:

Number of Days in Underlying Rate:

days

FRA Payoff:

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1. What is FRA Payoff (Long Position)?

A Forward Rate Agreement (FRA) Payoff for a long position represents the net settlement amount exchanged between parties at expiration. It calculates the difference between the underlying rate at expiration and the forward contract rate, adjusted for the time period and notional principal.

2. How Does the Calculator Work?

The calculator uses the FRA Payoff formula:

\[ FRAp = NP \times \frac{(r_{exp} - r_{forward}) \times \frac{nur}{360}}{1 + (r_{exp} \times \frac{nur}{360})} \]

Where:

\( FRAp \) — FRA Payoff amount
\( NP \) — Notional Principal
\( r_{exp} \) — Underlying Rate at Expiration (%)
\( r_{forward} \) — Forward Contract Rate (%)
\( nur \) — Number of Days in Underlying Rate

Explanation: The formula calculates the present value of the interest rate differential between the actual rate at expiration and the agreed forward rate.

3. Importance of FRA Payoff Calculation

Details: Accurate FRA payoff calculation is crucial for hedging interest rate risk, speculating on future rate movements, and determining the net settlement amount between counterparties in forward rate agreements.

4. Using the Calculator

Tips: Enter notional principal in dollars, rates as percentages, and number of days. All values must be positive numbers with valid ranges.

5. Frequently Asked Questions (FAQ)

Q1: What is a long position in FRA?
A: A long position in FRA means the party agrees to pay a fixed rate and receive a floating rate, benefiting when interest rates rise above the forward rate.

Q2: When is FRA payoff settled?
A: FRA payoff is typically settled at the beginning of the underlying interest period, with the amount representing the present value of the interest differential.

Q3: What happens if rates move against the long position?
A: If rates fall below the forward rate, the long position will result in a negative payoff, meaning the long position holder must pay the counterparty.

Q4: Are FRAs traded on exchanges?
A: Most FRAs are over-the-counter (OTC) instruments negotiated directly between parties, though some standardized FRAs may be exchange-traded.

Q5: What are typical FRA durations?
A: FRAs typically cover periods from 1 month to 2 years, with common maturities including 3x6, 6x9, and 12x18 months.