The Ins and Outs of a Forward Rate Agreement

Standardized Legal Documents The Ins and Outs of a Forward Rate Agreement

How To Draw Up a Forward Rate Agreement 

If you are in charge of the institution entering a forward rate agreement, learning more about this legal document is a must. While it’s necessary for a particular loan type, writing such a contract can cause many headaches. The situation screams for a professional to draft the document for you. 

The good news is—that’s not the only option you have! Not only will DoNotPay’s guide help you understand the purpose of forward rate agreements, but it will also teach you how to create any contract fuss-free. Follow our tips and get a scoop on all the perks we offer!

Forward Rate Agreements in a Few Words

A forward rate agreement is a contract that binds one party (usually a seller) to lend a certain amount to the other (a buyer) at a fixed interest rate. The primary concern of the counterparties is to predetermine the rate for a notional loan starting on a predefined date. 

The contract allows the parties to fix the borrowing and lending rate, but since it’s a notional agreement, it doesn’t impose the exchange of principal on the expiration date. Forward rate agreements essentially fix the interest rate and determine it for a future loan.

How To Calculate a Forward Rate

The calculation for a forward rate contract consists of the following steps:

  1. Estimate the difference between:
    • A forward rate
    • A reference or floating rate
  2. Multiply the notional sum of the contract by the rate differential
  3. Multiply the result by the contract duration (in days)
  4. Divide the number you get by 360

Once you do this, proceed to the second part of the formula:

  1. Divide the contract duration (in days) by 360
  2. Multiply the result by reference or floating rate plus 1
  3. Multiply the result from the first part of the formula by the number you get in the second

Why Should You Sign a Forward Rate Agreement?

The whole formula calculation may look complicated, but signing this agreement brings many perks to both concerned entities. Forward rate contracts should be your choice because they:

  • Are perfect for all investors and businesses that want to make their interest rates fixed and avoid further modifications
  • Shield the seller from interest rate declines in the future
  • Help to handle short-term interest rate exposures
  • Decrease uncertainty and help the parties budget cashflows properly
  • Have a significant role in trading related to the expectations of market participants
  • Can come in handy when making arbitrage strategies if market participants plan to use the price differences between the contract and other interest rate instruments in their favor

Are You Struggling With Your Contract Drafts? DoNotPay Can Help!

Composing a contract takes a lot of time and requires a high legal expertise level. Any mistake in your agreement can put its validity at risk. That is why people usually turn to attorneys who charge unreasonable amounts for a professional draft. 

Luckily, DoNotPay offers a more affordable and simpler option! We created a virtual lawyer that can generate a contract tailored to your needs in less than five minutes! Our app allows you to modify various customizable templates to get a complete personalized document without professional assistance. 

Here’s how to use this service:

  1. Open DoNotPay in your web browser
  2. Type in the name of the document you want to create
  3. Give us all the details we should include in your contract
  4. Download a ready-made document

Once you get your contract, sign it and have it notarized if necessary.

Here’s a table showing all the documents we can create:

Business contracts
Real estate contracts
Miscellaneous contracts

Learn How Other Agreements Work From Our Handy Guides

Not only do we help you learn to handle forward rate contracts, but we also provide valuable advice on many other popular agreements, such as:

Got Some Extra Questions on Legal Docs? We Can Help!

Sometimes you need that additional info to draft a perfect contract. Visit our knowledge base and get the answers to all your contract-related questions, such as:

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