Forward Rate Agreement (FRA) | CA Final SFM
These are simplest forms of Interest Rate Derivatives. Under FRA, an interest rate, that is to be effected in future in agreed upon at earlier date.
For example, X Ltd. enters into FRA with IDBI Bank on 01.04.2011 that it shall borrow from the bank at the rate of 12.5% per annum interest on 01.04.2012. In this contract the amount is to be borrowed on 01.04.2012. The interest rate applicable on such borrowings has been agreed upon as on 01.04.2011.
On the date, the loan is sanctioned the interest rate prevailing in the market may not be 12.5% per annum. If interest rate prevailing in the market is more than 12.5% per annum, then X Ltd. will be benefitted by borrowing at a low rate of interest.
On the contrary, if such interest rate, prevailing in the market is lower than 12.5% per annum, X Ltd. will lose on account of high rate of interest that it will have to bear.
From the above example the following conclusions can be drawn:
- A benefit along with obligation: At one side X Ltd. is benefitted by borrowings at a fixed interest rate that too, agreed upon 1 year prior to the date of raising the funds; it also commits the borrowals at such agreed interest rate.
- The parties may not always be benefitted by entering into FRA.
- There is always a risk of default, i.e., parties involved in the contract may not honour such contract.
- FRAs are not “Exchange Regulated”.
- Margin Money may or may not be deposited at the time of entering into agreement.
February 02, 2021
February 02, 2020
April 04, 2019
Congratulations…!! CA Harish Wadhwani for scoring 93 marks in SFM (CA Final)
Securitization CA Final SFM Securitisation a chapter in Strategic Financial Management (SFM). This is an important chapter from the CA Exam point of view as well. The concept has been explained with a comprehensive example, to make sure the concepts are very clear. It mainly talks about Debt Securitisation, Mortgage-Backed Securities, Securitisation Process, Credit Rating Continue reading
Things you should do before your CA Final Exams Clearing CA Final Exam is clearly not a simple cake walk. You need to be extremely committed to attending your CA final coaching classes. As the subjects are numerous, you need to study your lessons as and when they’re taught your respective CA final Coaching class. Continue reading
CA final SFM has a few topics which carry a fine weight-age in each trial which are Foreign Exchange Risk Management, Capital Budgeting, Derivatives, and Portfolio Management. But in its place of starting with a topic keeping huge concepts start with a bit lighter note and extremely interesting niche i.e. Bold Valuation. Thereafter full acquisition Continue reading
A Two way Quote indicates a set of two different rates of exchange known as Bid Rate and Ask Rate. In a Two Way Quotes, the rate at which bank will buy the currency and the customer will sell the currency is known as Bid Rate. The rate at which bank will sell the Continue reading
Exchange Rate A rate at which one currency can be exchanged with the other. It is a rate at which one currency expressed in terms of the other. It is a rate at which a currency can be bought or sold. Direct Quote & Indirect Quote
Need for Corporate Valuation Along with the enterprise growth, number of stakeholders also grows. Presentation of annual financial statements becomes. Curiosity of the stakeholders to understand the ‘true worth’ of their enterprise becomes translated to the concept of ‘valuation’. The market analysts, financial intermediaries, and the academicians, also attempt to apply their valuation approaches Continue reading
When Forward Interest Rate Agreements are regulated through the “Exchange”, it will become Interest Rate Futures. However, the mechanism of IRF is different from FRA. The system is designed in a manner that interest rate is made up as a marketable product. The following example, will clarify as to how interest rate futures are Continue reading