Which of the following statements concerning forward rate agreements (FRAs) are true

                      I.        FRAs cannot be tailored to the specific requirements of a customer.

                    II.        FRAs are binding agreements that must be settled at the settlement date.

                   III.        FRAs do not require any payments or receipts until the settlement date.

                  IV.        FRAs can be resold in the secondary market

Solution

Forward rate agreements (FRA) are over-the-counter contracts between parties that determine the rate of interest to be paid on an agreed upon date in the future. An FRA is an agreement to exchange an interest rate commitment on a notional amount. FRA is essentially a forward-starting loan, but with no exchanges of principal, so that only the difference in interest rates is traded. An FRA is a forward-dated loan, dealt at a fixed rate, but with no exchange of principal – only the interest applicable on the notional amount between the rate dealt and the actual rate prevailing at the time of settlement changes hands. So FRAs are off-balance sheet (OBS) instruments. By trading today at an interest rate that is effective at some point in the future, FRAs enable banks and corporates to hedge interest rate exposure. They may also be used to speculate on the level of future interest rates.