Forward rate agreement (FRA) is a financial derivative instrument that sets an agreed-upon interest rate for a future period. It is a contractual agreement between two parties, where the buyer agrees to pay the seller a fixed interest rate on a notional amount of money for a future time period. The seller, in turn, agrees to pay the buyer the prevailing market interest rate on the same notional amount for the same time period.
In Romania, “forward rate agreement” is known as “acordul de rată înaintată”. It is a financial instrument used by banks and other financial institutions to manage interest rate risks. The FRA market in Romania is relatively new but is gradually gaining popularity among market participants.
The FRA market in Romania is regulated by the National Bank of Romania (BNR), which oversees the market and sets guidelines for its operation. The BNR requires that all FRAs be cleared through a central counterparty to reduce counterparty risk.
FRAs are primarily used by banks and other financial institutions to manage interest rate risks. These institutions use FRAs to hedge against changes in interest rates that could negatively impact their bottom line. Investors also use FRAs to speculate on interest rate movements, taking advantage of differences between the fixed and prevailing market interest rates.
Most FRAs are settled in cash, with the net difference between the fixed and market interest rates paid to the party that is in the money. However, some FRAs may be settled by the delivery of the underlying asset, such as a bond or interest-rate swap.
In conclusion, forward rate agreements are a useful financial instrument for managing interest rate risks. In Romania, the FRA market is regulated by the National Bank of Romania, and it is gaining popularity among market participants. As with any financial instrument, it is essential to understand the risks and potential rewards associated with FRAs before investing.