Derivatives- FRA related question question

rosewhite

When doing FRA related questions I realized that:

- all cash settlement are done at contract expiration date and
- at the start of floating reference rate (i.e. LIBOR)

Is this a norm for FRA related questions, that is, the settements are always done at the end of the contract expiration AND at the start of floating rate reference?

If the question is not straight forward let me know and I will provide relevant examples.

Thanks.

pacmandefense

If some particular scenarios are confusing, always fall back on the fundamentals.

FRA is essentially a forward contract to borrow or lend money at a certain rate in the future the contract date. And we know that in a forward contract, both parties are OBLIGATED to execute their duties at the contract date. Hence, settlement is always done at the contract date, including FRA.

And since the interest cost/savings would only happen at the end of the loan term (30 days LIBOR etc), the payment at settle is always the present value of the interest difference.

Siddimaula

I don't think that will happen because a forward contract can only be terminated by entering opposite contract (either with same or different party).