Options - Part C

c. compare and contrast interest rate options to forward rate agreements (FRAs);

A forward rate agreement or FRA is similar to any type of forward contract, but the payoff is based on an interest rate, rather than the price of an asset.

Interest rate options are a lot like forward rate agreements. Instead of being a firm commitment, they represent the right to make a fixed interest payment and receive a floating interest payment or to make a floating interest payment and receive a fixed interest payment. Interst rate options have a strike rate or exercise rate instead of price.


Don chance, pages 466, 474, 475