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CHAPTER 12
Ref : FR
July 1999
Release G10.0
TABLE OF CONTENTS
12
Introduction .......................................................................................................................12-1
12.2
FRA.PARAMETER ..........................................................................................................12-2
12.2.1 Future Rate Agreement Types ........................................................................................12-2
12.2.2 General processing information......................................................................................12-3
12.2.3 Accounting information..................................................................................................12-3
12.3
Inputting a FRA.................................................................................................................12-4
12.3.1 Basic Information ...........................................................................................................12-4
12.3.2 Additional Information ...................................................................................................12-6
12.3.3 Related Deals..................................................................................................................12-6
12.4
FRA positions.....................................................................................................................12-7
12.4.1 Position Definition..........................................................................................................12-7
12.4.2 Information held .............................................................................................................12-8
12.5
12.6
FRA Position Management Interface ............................................................................12-10
12.6.1 Cash-Flow/Liquidity.....................................................................................................12-10
12.6.2 Interest Gap ..................................................................................................................12-10
12.6.3 FX Position...................................................................................................................12-10
12.7
FRA Accounting ..............................................................................................................12-11
12.7.1 Specific rules for Trade Deals ......................................................................................12-11
12.7.2 General FRA rules ........................................................................................................12-12
12.7.3 Accounting entries on deal date - all contracts .............................................................12-13
12.7.4 Accounting entries from trade date to rate fixing .........................................................12-13
12.7.4.1
Open trade contracts............................................................................................12-13
12.7.4.2
Closed trade contracts .........................................................................................12-14
12.7.5 Rate fixing ....................................................................................................................12-15
12.7.6 Accounting entries on settlement date - trade contracts ...............................................12-16
12.7.7 Accounting entries on settlement date - hedge contracts ..............................................12-17
12.7.8 Accounting entries on late settlement date - trade contracts.........................................12-18
12.7.9 Accounting entries on late settlement date hedge contracts..........................................12-19
12.8
12.9
FRA calculations..............................................................................................................12-21
12.9.1 Future Rate Calculation ................................................................................................12-21
12.9.2 FRA Valuation..............................................................................................................12-24
12.9.3 Calculation of Settlement Amount ...............................................................................12-26
Ref : FR
July 1999
Release G10.0
FRA Purchases:
PROFIT
Where the settlement rate is HIGHER than the FRA.DEAL contract rate
LOSS
Where the settlement rate is LOWER than the FRA.DEAL contract rate
FRA Sales:
PROFIT
Where the settlement rate is LOWER than the FRA.DEAL contract rate
LOSS
Where the settlement rate is HIGHER than the FRA.DEAL contract rate
Ref : FR
July 1999
12-1
Release G10.0
12.2 FRA.PARAMETER
Basic information for FRA processing is defined in the application FRA.PARAMETER. Each
COMPANY will have its own FRA.PARAMETER record; this allows FRA processing to be
specific to each business environment.
Ref : FR
July 1999
12-2
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Ref : FR
July 1999
12-3
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Counterparty
Principal (notional)
Currency
Rate
Commission
Brokerage
Settlement details, etc
The field which is essential to FRA input is the FRA.TYPE. This specifies whether the deal is a
TRADE or a HEDGE. FRA.DEAL will not accept input of a transaction unless the FRA.TYPE is
specified, as this tells the module how to process the accounting for the deal. The following
screens show the input fields for a trade deal:
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July 1999
12-4
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Ref : FR
July 1999
12-5
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LCY
Today or earlier
Trade date
Spot date + period (1)
Start date
Start date + period (2)
FCY, if different
Trade date + 2
Start date - 2
A number of rates are input on a FRA. Key rates are the INTEREST.RATE - the rate agreed
when the FRA is input and the SETTLEMENT.RATE the prevailing rate on rate fixing date. The
difference between these two rates determines the settlement amount. In addition, the
REFERENCE.RATE and REFERENCE.PRICE are used to for tolerance checking.
Ref : FR
July 1999
12-6
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Figure 12-6 FRA.POSITION - for USD, Dealer desk 01, period Feb 8th - April 7th
Ref : FR
July 1999
12-7
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Each position also keeps information about constituent deals. Trades done today are kept
separate from previous business, but the following information is stored for both:
Deal id
Trade date
Principal
FRA rate
Profit, if closed.
Ref : FR
July 1999
12-8
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Ref : FR
July 1999
12-9
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12.6.1 Cash-Flow/Liquidity
For both trade and hedge contracts, from the input of the FRA contract, until the rate fix date
each end of day a projected cash-flow is calculated, using the PERIODIC.INTEREST table,
similar to the Trade contract revaluation process. This figure is passed each day to the cash-flow
enquiry until rate fix date, when the projected figure is replaced by the true value.
On rate fixing day, as determined by the FRA.PARAMETER Table, but which is normally for
foreign currency two days before, and for local currency equal to settlement date, the settlement
amount is calculated, and the resulting profit ("IN") or loss ("OUT") will be included in the cash
flow under the settlement value date.
12.6.3 FX Position
The standard FX position call is done within the accounting process, whenever entries impact the
foreign exchange position. This will be the case for example on:
Foreign currency charges & commission
Accruals on hedge contracts in foreign currency etc
Ref : FR
July 1999
12-10
Release G10.0
End of day when closure deals are input, or deals are reversed
Revaluation time
Settlement date
Realised profit can either be posted on trade date or deal start date
Unrealised profit can either be posted, or not posted.
Ref : FR
July 1999
12-11
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Ref : FR
July 1999
12-12
Release G10.0
DR/CR
Details
CONTINGENT (CRB)
DR
CR
DR
P&L - (FRA.PARAMETER)
CR
BROKER - (ACCOUNT.CLASS)
CR
P&L - FT.CHARGES
DR
BROKERAGE
CHARGES/COMMISSION
Between deal date and rate fixing date, for trade contracts only, revaluation takes place
determined by the frequency specified in the FRA.PARAMETER, with the resulting profit or
loss optionally booked or not to unrealised profits. Again this is determined by the field
BK.UR.PFT in FRA.PARAMETER input. See the FRA.PARAMETER helptext for a more
detailed explanation of the options on profit/loss booking.
The revaluation is based on the net FRA.POSITION by currency until rate fixing day, from
whence the deals are re-valued individually until settlement day. Each new revaluation will
result in the previous days calculation being reversed, and the updated figure being posted to
the internal asset or liability account.
Accounting type
DR/CR
Details
PROFIT
CR
DR
DR
CR
P&L - (FRA.PARAMETER)
INTERNAL ASSET A/C - (FRA.PARAMETER)
P&L - (FRA.PARAMETER)
INTERNAL LIAB A/C - (FRA.PARAMETER)
LOSS
Ref : FR
July 1999
12-13
Release G10.0
Profit or Loss for Closed contracts is locked in when the closing trade is made. According
to the setting of REAL.PFT.T/S in FRA.PARAMETER this realised Profit can either be taken
on trade date, or on settlement date.
If Profit is to be taken on Trade date, the following additional postings are made on Trade
date;
Accounting type
DR/CR
Details
PROFIT
CR
DR
DR
CR
P&L - (FRA.PARAMETER)
INTERNAL ASSET A/C - (FRA.PARAMETER)
P&L - (FRA.PARAMETER)
INTERNAL LIAB A/C - (FRA.PARAMETER)
LOSS
There are no revaluation entries between Trade date and Rate setting date for Closed trades,
as the Profit from the contracts cannot change.
If the Profit is to be taken on Settlement date, the above entries will only be made in the case
of closing out a Loss. If the closure has made a Profit, no entries will be made to reflect this
until settlement date, when the money is actually received from the counterparty.
Ref : FR
July 1999
12-14
Release G10.0
DR/CR
Details
PROFIT
DR
CR
CR
DR
P&L - (FRA.PARAMETER)
INTERNAL ASSET A/C - (FRA.PARAMETER)
P&L - (FRA.PARAMETER)
INTERNAL LIAB A/C - (FRA.PARAMETER)
LOSS
DR/CR
Details
PROFIT
CR
DR
DR
CR
P&L - (FRA.PARAMETER)
INTERNAL ASSET A/C - (FRA.PARAMETER)
P&L - (FRA.PARAMETER)
INTERNAL LIAB A/C - (FRA.PARAMETER)
LOSS
(Unless realised profit is deferred till settlement date, in which case no entries are made for
trades in profit until then.)
Ref : FR
July 1999
12-15
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DR/CR
Details
PROFIT
CR
P&L - (FRA.PARAMETER)
DR
CUSTOMER/NOSTRO
-ORLOSS
CONTINGENT (CRB)
DR
P&L - (FRA.PARAMETER)
CR
CUSTOMER/NOSTRO
CR
DR
Ref : FR
July 1999
12-16
Release G10.0
DR/CR
Details
PROFIT
CR
* IRIA - (FRA.PARAMETER)
DR
CUSTOMER/NOSTRO
-ORLOSS
CONTINGENT (CRB)
DR
* IPIA - (FRA.PARAMETER )
CR
CUSTOMER/NOSTRO
CR
DR
Accounting type
DR/CR
Details
PROFIT
DR
* IRIA - (FRA.PARAMETER)
CR
P&L (FRA.PARAMETER)
-ORLOSS
CR
* IPIA - (FRA.PARAMETER)
DR
P&L (FRA.PARAMETER)
Ref : FR
July 1999
12-17
Release G10.0
DR/CR
Details
PROFIT
CR
P&L - (FRA.PARAMETER)
DR
-OR
LOSS
CONTINGENT (CRB)
DR
P&L - (FRA.PARAMETER)
CR
CR
DR
Accounting type
DR/CR
Details
PROFIT
DR
CUSTOMER/NOSTRO
CR
-OR
LOSS
CR
CUSTOMER/NOSTRO
DR
Ref : FR
July 1999
12-18
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DR/CR
Details
PROFIT
CR
IRIA - (FRA.PARAMETER)
DR
DR
IPIA - (FRA.PARAMETER)
CR
CONTINGENT
CR
(CRB)
DR
LOSS
Accounting type
DR/CR
Details
PROFIT
DR
IRIA - (FRA.PARAMETER)
CR
P&L - (FRA.PARAMETER)
CR
IPIA - (FRA.PARAMETER)
DR
P&L - (FRA.PARAMETER)
LOSS
Accounting type
DR/CR
Details
PROFIT
DR
CUSTOMER/NOSTRO
CR
-OR
LOSS
CR
CUSTOMER/NOSTRO
DR
Ref : FR
July 1999
12-19
Release G10.0
Description
FRA positions revalued
List of outstanding hedges
Accruals on hedge deals
FRAs where rate has to be fixed soon (as specified on
FRA.PARAMETER)
FRAs where start date has passed, but rate not fixed
List of all live transactions
FRAs where rate not fixed yet
List of FRAs still to be confirmed by the counterparty
List of FRAs still to be confirmed by the broker
P&L breakdown for each position
Table 12-15 FRA reports
Ref : FR
July 1999
12-20
Release G10.0
R1
Today
Spot
R2
FRA Start
Maturity
Assuming there are two futures contracts on the market with quoted rates R1 and R3,
covering the period from Spot to FRA Start and from Spot to Maturity respectively, the
formula to calculate the forward rate R2 is as follows:
R1 * D1
R2 * ( D3 D1)
R3 * D3
Nominal * 1 +
* 1 +
= Nominal * 1 +
B *100
B *100
B *100
where
R1 = rate for short period (the period between Spot and FRA Start)
D1 = number of days in short period
R3 = rate for long period (the period between Spot and Maturity)
D3 = number of days in long period
B = interest day basis
Ref : FR
July 1999
12-21
Release G10.0
1+
( R2 * ( D3 D1))
R3 * D3
= 1 +
B * 100
B * 100
R1 * D1
1 +
B * 100
R3 * D3
1 + B * 100
B * 100
R2 =
1 *
1 + R1 * D1
D3 D1
B * 100
R2 =
( R3 * D3) ( R1 * D1)
B * 100
*
D3 D1
( B * 100) + ( R1 * D1)
R2 =
( R3 * D3) ( R1 * D1) R1 * D1
+ 1
B * 100
D3 D1
Figure 12-7 FRA future rate calculation formula
Ref : FR
July 1999
12-22
Release G10.0
Example
Today is August 8th 1996 (spot date 10th August 1996) and we wish to revalue an existing
contract.
Contract
Contract rate =
Start date
=
Maturity date =
9.40
20 Sept 1996
20 Dec 1996
R1
R3
=
=
=
=
9.40
9.45
These rates are found or, when necessary, interpolated from the PERIODIC.INTEREST rate
table.
D1
D3
=
=
=
=
41 days
132 days
(Note that number of days is always calculated from the spot date)
Substituting in the above formula we find:
R2 =
9.40 41
+ 1
360 100
(1,247.40) (385.40)
=
862
= 91
91
385.40
+ 1
36000
([0.0105589041] + 1)
= 9.47252747 10105589041
.
R2 = 9.37% to 2dpl
Ref : FR
July 1999
12-23
Release G10.0
Profit.or.Loss = Nominal *
where
Nominal
Mkt.Rate
market rate
Deal.Rate =
NDays
Since the FRA contract is settled up-front the formula for the present value of the Profit/Loss
is as follows:
Present.Value =
Present.Value =
Profit.or.Loss
Mkt. Rate * NDays
1+
B * 100
Nominal * NDays * ( Mkt. Rate Deal. Rate)
( B * 100) + ( Mkt. Rate * NDays)
Figure 12-8 FRA valuation formula
Ref : FR
July 1999
12-24
Release G10.0
Example
Position & Profit calculation: example using above formula
1) Purchase
Gives a Position of
200M GBP
2) Then Sell
at 9.25%
Profit
P=
Profit of 0.35 at 150 million for 3 months, and a new position of Short 50 million at 9.6%.
Ref : FR
July 1999
12-25
Release G10.0
S=
( I F ) ( N P)
B 100 + ( I N )
where
I
F
N
P
B
To settle the contract in the first example, i.e. a purchase of 1 against 4 FRA for 250M USD at
9.4%, when LIBOR is at 9.37%;
S=
(0.03) (22,750,000,000)
36000 + (852.67)
= -18,519.69
Ref : FR
July 1999
12-26
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Ref : FR
July 1999
12-27
Release G10.0