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FRA - FORWARD RATE AGREEMENTS

FRA FORWARD RATE AGREEMENTS
Explain in detail why a swap is a collection of forward rate agreements (FRAs).
Please incorporate two high quality references
A swap can generally be termed or defined as any such agreement between two consenting parties (who are also referred to as counterparties) to exchange cash flows sequentially denominated in either the same of different currencies in the future. For generalization of the definition, the exchanges can generally be termed on the basis of some underlying assets in the agreed upon quantities. Such exchanges or payments are referred to as service payments, while the underlying assets which eventually may or fail to be exchanged referred to as notionals ((Kolb & Overdahl, 2007, p. 659; Marshall & Kapner, 1993, p. 28).
As a result of its nature and based off this definition, there exist five basic kinds of swaps within finance. These are interest rate swaps, equity swaps, foreign currency swaps, credit swaps and commodity swaps. Interest rate swaps tend to have one party paying interest off a floating rate while the other party will usually pay it at a fixed rate. With foreign currency swaps, one party will usually pay; say in dollars and at a floating rate, while the other party ends up paying in the British Pound at a fixed rate. While there may basically be varying motivations into why individuals participate in the swaps market such as speculation, hedging up to arbitrage, the basic motivation for getting into it is usually for businesses to determine the shape as well as control the interest rate as well as any inherent foreign currency risk that may affect the firm's commercial operations (Kolb & Overdahl, 2007, p. 659).
Swaps generally commence on a given effective date or value date. Concurrently, they also end on a set out termination date or maturity date. As there will usually exist a period of time between the said two dates, this period is referred to as the swap's tenor or maturity. During the course of the swap's tenor, service payments are meted out as specified within the swap agreement. Typically, such payments occur at intervals ranging from annual, semi-annual, quarterly or on monthly terms (Marshall & Kapner, 1993, p. 29).

Having seen what swaps are and a little regarding their nature, foreign rate agreements (FRAs) on the other hand may be referred to as "bilateral over-the-counter derivative contract directly negotiated between two parties fixing the rate of interest on a notional loan or deposit for a period of time in the future" (Chisholm, 2002, p. 175). This definition indoctrinates the very same nature as had previously been discussed regarding swaps, making inference to swaps as being FRAs. Since swaps satisfy every consideration that makes for FRAs such as being a derivative instruments, having negotiation between two consenting parties, having interest rates fixed on a notional or underlying asset and the fact that swaps are also made for a specific period in time in the future, then swaps can the be said to be a collection of forward rate agreements (FRAs).

Reference
Chisholm, A.M. (2002), An Introduction to Capital Markets: Products, Strategies, Participants, Chisester, West Sussex: John Wiley & Sons, Inc.
Kolb, R.W. & Overdahl, J.A. (2007). Futures, Options and Swaps, 5th Edition, Malden, MA: Blackwell Publishing.
Marshall, J.F. & Kapner, K.R. (1993). Understanding Swaps, Canada: John Wiley & Sons, Inc.

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FRA FORWARD RATE AGREEMENTS
Explain in detail why a swap is a collection of forward rate agreements (FRAs).
Please incorporate two high quality references
A swap can generally be termed or defined as any such agreement between two consenting parties (who are also referred to as counterparties) to exchange cash flows sequentially denominated in either the same of different currencies in the future. For generalization of the definition, the exchanges can generally be termed on the basis of some underlying assets in the agreed upon quantities. Such exchanges or payments are referred to as service payments, while the underlying assets which eventually may or fail to be exchanged referred to as notionals ((Kolb & Overdahl, 2007, p. 659; Marshall & Kapner, 1993, p. 28).
As a result of its nature and based off this definition, there exist five basic ...

Solution Summary

The forward rate agreements.

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