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- 2011-7-11
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3#
发表于 2011-7-13 16:14
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Hi,
Lets first understand the definition of forward contract: A forward contract is an agreement between two parties to buy/sell an underlying asset at a future specified date and price
One of the example of Forward contract is FRA where the underlying is the interest rate (reference is generally LIBOR), Where at maturity if the LIBOR rate is above the Forward rate, the Buyer of the FRA will be in profit = (LIBOR - Forward rate) * Face value.
Note: As FRA is to lend/borrow money, the interest saving will only come until the loan period, so the profit needs to be discounted to PV.
Now lets come to Swaps, Swaps are also like forward contract, only difference is that here instead of buying/selling an underlying asset we are talking about exchanging a cash flow on periodic settlement dates.
Lets take an example of Swaps based on interest rate (Interest rate swaps)
Again the reference is LIBOR rate and now instead of one settlement date we will have periodic settlement dates.
So as you can now compare the FRA with interest rate swaps, where FRA is only one payment at settlement date, and the Interest rate swaps consists of series of payments on the periodic settlement dates |
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