Forward rate lock swap
In this post I’m going to introduce two of the fundamental interest rate products, Forward Rate Agreements (FRAs) and Swaps. FRAs allow us to ‘lock in’ a specified interest rate for borrowing between two future times, and Swaps are agreements to exchange a future stream of fixed interest payments for floating ones, or visa-versa. A forward starting interest rate swap is a variation of a traditional interest rate swap. It is an agreement between two parties to exchange interest payments beginning at a date in the future. The key difference is when interest payments begin under the swap. Interest rate protection begins immediately for a traditional swap. As with other forward contracts, parties prefer to lock in terms today for future exchanges using a forward swap. The most common swap is a fixed to floating interest rate swap. For example, company A only has access to a variable rate loan, but would prefer the stability of a fixed rate loan.