Bank DnB NORD Polska offers its customers modern solutions for hedging interest rate risks: Forward Rate Agreements (FRA) and Interest Rate Swaps (IRS).

A Forward Rate Agreement (FRA) is an agreement between two parties on fixing the interest rate for a future interest rate period and an underlying nominal volume. It constitutes a hedge against an unfavourable future development of interest rates. The partners undertaken to exchange – at a fixed date in the future – interest rate payments on a defined nominal amount in the same currency, with one of the two parties guaranteeing interest rates at the level of a fixed interest rate (FRA contract interest rate) and the second party paying interest in line with the WIBOR reference rate. The fixed interest rate is determined when the FRA transaction is concluded. On the other hand, the level of the WIBOR reference rate is determined by both parties to an agreed date in the future when the FRA contract is settled.

 

Let us assume that a borrowed has a loan at 3M WIBOR reference rate + premium which he wants to hedge for 6 months against an increase of this reference interest rate. To do this, he concludes a FRA 6 x 9 transaction with the bank (he acquires a FRA 6 X 9 contract). In this situation, the borrower (FRA buyer) undertakes to pay interest in line with the defined FRA interest rate in six months. In its turn, the bank undertakes to pay interest on the basis of the 3M WIBOR published in 6 months.

 

 

The Interest Rate Swap (IRS) is an agreement between two contracting parties to swap during a specific period different interest rate payments in the same currency related to a principal amount. Most frequently one of the two parties pays interest at a fixed rate while the second has a variable rate of interest.

 

An example for the IRS is a contract between two companies which reciprocally agree to pay interest on PLN 10 million over a period of 5 years on a semi-annual basis. In doing so, company A pays company B interest according to 6M WIBOR, while company B pays company A in line with a fixed interest rate of 8%.