Does 1 x 3 FRA mean that it will begin in 1 month and mature in 3 months or that the FRA will mature in 1 month?
I’ve seen it explained it both ways and wanted to confirm
And the rate duration used can be found by 3-1?
The FRA itself begins today and expires in one month. The loan period starts in one month and ends in three months.
I wrote an article on FRAs that may be of help: http://financialexamhelp123.com/fras/.
It means the FRA will expire in 1 month and loan period will be of 2 months.
No: the loan period will be 2 months: starting at the end of month 1 and ending at the end on month 3.
My apologies , The loan period will be of 2 months.
Thanks, I was confused about FRA maturity and loan maturity during my readings.
So a 1x3 FRA means that the FRA expires in 1 month but the loan starts in 1 month and it is based on a 90 day reference rate. Does that sound right?
It’s based on a 60-day reference rate: the loan’s for 2 months, not 3.
In an m × n FRA, the loan starts in m months and ends in n months; it’s an (n – m)-month loan. So, in a 1 × 3 FRA, the loan starts in 1 month and ends in 3 months; it’s a 2-month loan.
I came across a statement that confused me
It says that at expiration of a FRA, neither party will borrow from or lend to the other at expiration. I thought when the FRA expires after 1 month, that’s when the lending and borrowing starts for 2 months?
Is this just saying that there’s no physical lending/borrowing, and FRAs are cash settled only one way?
That’s correct: there is no actual lending; an FRA is settled at expiration (at the beginning of the loan period) for the present value of payment that would be made at the end of the loan period (if the money were actually lent).