- CFA Exams
- CFA Level I Exam
- Study Session 16. Derivatives
- Reading 49. Basics of Derivative Pricing and Valuation
- Subject 4. Forward Rate Agreements
CFA Practice Question
A forward rate agreement is an agreement to buy or sell ______.
A. an interest rate contract linked to, say, LIBOR
B. an equity contract
C. a foreign exchange contract
Explanation: A forward rate agreement is based on an interest rate. One side buys the rate and the other side sells the rate. At settlement, the difference between the contractual rate and actual rate is settled by indexing the amount to a notional principal.
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