RMB FRA

General

It is tool for risk control of interest rate, in which the interest of rate for transaction under a signed agreement is fixed. The seller and buyer enter into agreement on the conventional interest rate and market interest rate for a future period. If the market interest rate is higher than the conventional interest rate on the settlement date, the seller in the agreement of forward interest rate shall compensate the buyer for the difference between the aforesaid two rates. On the other hand, if the market interest rate is lower than the conventional interest rate on settlement date, the buyer in the agreement of forward interest rate shall compensate the seller for the difference between the aforesaid two rates.

Features

1.The risk of interest rate of a certain period in future is fixed; 2.Saving capital cost: The delivery refers to the difference of interest rate only, involving in no settlement of principal; 3.Flexibility: Reverse operation is available, prior to the maturity of forward interest rate, to settle the original agreement. 4.The agreement of forward interest rate may be used for both locking interest rate of loan (applicable for the borrower) and fixing the interest rate for fund application (applicable for the lender). Buy the agreement of forward interest rate to lock the interest rate of loan. Sell the agreement of forward interest rate to lock the earning of capital application.

Conditions for application

Customers who meet the stipulations of related policies

Trade Price

The actual trade price in this business is determined according to the instant actual trade price.

Cases

A fund manger of Company A predicts that a sum of USD 1 million will become payable in three months on 1st April and the manager expects the interest rate of USD will fall. Therefore the manager sells the 3×6 agreement of forward interest rate (i.e. the term of agreement ranging from 3 month after the agreement date to 6 months after the agreement date) at the conventional interest rate of 1.1825%. The agreement of forward interest rate is as follows:

Seller: Company A
Buyer: Bank
Sum of agreement: USD 10,000,000.00
Agreement date: 4th April
Settlement date: 6th July
Maturity date: 6th October
Determination date of interest rate: 4th July
Rate for agreement of forward interest rate: 1.1825%
Term of agreement: 92 days

If the market interest rate of 4th July falls to 1.0025% as expected, the Bank shall pay Company A the difference between conventional interest rate of 1.1825% and market interest rate of 1.0025%. The detail calculation is as follows:

[10000000×(1.1825%-1.0025%)×92/360]/(1+1.0025%×92/360)=4588.25

The interest difference, which shall be paid by the Bank for Company A on 6th July, shall be USD 4588.25. That is, the interest income arising from capital application of Company A will be maintained at the original interest rate despite the fall of actual interest rate because Company A uses agreement of forward interest rate for risk control.

Kind Reminders

The customer may not benefit from the rising interest rate for the rate has been fixed in the agreement.