DOCSLIB.ORG

Half-Yearly Financial Report at 30 June 2019

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Half-Yearly Financial Report at 30 June 2019 Half-Yearly Financial Report at 30 June 2019 Contents Composition of the Corporate Bodies 3 The first half of 2019 in brief Economic figures and performance indicators 4 Equity figures and performance indicators 5 Accounting statements Balance Sheet 7 Income Statement 9 Statement of comprehensive income 10 Statements of Changes in Shareholders' Equity 11 Statement of Cash Flows 13 Report on Operations Macroeconomic situation 16 Economic results 18 Financial aggregates 22 Business 31 Operating structure 37 Significant events after the end of the half and business outlook 39 Other information 39 Notes to the Financial Statements Part A – Accounting policies 41 Part B – Information on the balance sheet 78 Part C – Information on the income statement 121 Part D – Comprehensive Income 140 Part E – Information on risks and relative hedging policies 143 Part F – Information on capital 155 Part H – Transactions with related parties 166 Part L – Segment reporting 173 Certification of the condensed Half-Yearly Financial Statements pursuant to Article 81-ter of 175 CONSOB Regulation 11971 of 14 May 1999, as amended Composition of the Corporate Bodies Board of Directors Chairperson Massimiliano Cesare Chief Executive Officer Bernardo Mattarella Director Pasquale Ambrogio Director Leonarda Sansone Director Gabriella Forte Board of Statutory Auditors Chairperson Paolo Palombelli Regular Auditor Carlo Ferocino Regular Auditor Marcella Galvani Alternate Auditor Roberto Micolitti Alternate Auditor Sofia Paternostro * * * Auditing Firm PricewaterhouseCoopers S.p.A. Financial Reporting Manager Elena De Gennaro The first half of 2019 in brief Economic figures and performance indicators Change Reclassified income statement (millions of euro) Amount % 13.4 -4.0 -23 Net interest income 17.4 15.7 of which: interest income -4.0 -20 19.7 -2.3 of which: interest expense -2.3 0.0 0 27.0 -2.1 -7 Net fees and commissions 29.1 40.3 Net banking and insurance income Titolo asse46.9 -6.6 -14 19.0 -5.3 -22 Operating profit/(loss) 24.3 11 Net operating profit/(loss) 15.1 -4.1 -27 9.9 -5.8 -37 Gross profit from continuing operations 15.7 7.7 Profit for the period -3.5 -31 11.2 Profitability indicators (%) 52.8 Cost/Income (net of expense 48.2 recoveries) 5.8 Annualised net operating income/average shareholders’ equity 9.1 (ROE) 33.2 Net interest income/Net banking and insurance 37.1 income 67.0 Net fees and commissions/Net banking and insurance 62.1 income 0.6 Annualised net income/Total 1.8 assets Number of employees Employees 310 300 30/06/2019 Equity30/06/2018 figures and performance indicators Change Balance sheet data (millions of euro) Amount % 1,466.9 Due from customers 36.0 3 1,430.9 1,408.6 of which: performing 40.9 3 1,367.7 87.9 Due from banks 25.6 41 62.3 2,060.9 75.3 Total deposits 4 1,985.6 272.6 27.4 Shareholders’ equity (excluding profit for the period) 11 245.2 Capital ratios (%) 22.17 Tier 1 capital/risk weighted assets (Tier 1 capital ratio) 19.62 Risk indicators (%) 0.8 Bad loans/Loans to customers 0.7 Classified loans/Loans to customers 4.0 4.4 30/06/2019 30/06/2018 Ratings Moody’s S&P Global Ratings Long-term deposit Baa3 Long-term Issuer Rating BBB- Short-term deposit P-3 Short-term Issuer Rating A-3 Outlook Stable Outlook Negative Issuer Rating Ba1 Accounting statements BALANCE SHEET - ASSETS Assets 30/06/2019 31/12/2018 10. Cash and cash equivalents 930,561 25,018,540 20. Financial assets measured at fair value through profit and loss 969 969 a) financial assets held for trading; b) financial assets designated at fair value; c) other financial assets mandatorily measured at fair value 969 969 30. Financial assets measured at fair value through other comprehensive income 758,736,495 715,751,445 40. Financial assets measured at amortised cost 1,554,791,456 1,493,237,182 a) due from banks 87,933,714 62,357,866 b) due from customers 1,466,857,742 1,430,879,316 50. Hedging derivatives 87,132,809 82,649,638 60. Value adjustments of financial assets with macro-hedging (+/-) 70. Equity investments 600,000 600,000 80. Property, plant and equipment 18,947,008 625,565 90. Intangible assets 1,896,658 1,997,729 - goodwill 100. Tax assets 11,849,026 20,277,305 a) current 793,435 5,424,640 b) deferred 11,055,591 14,852,665 110. Non-current assets and disposal groups held for sale 120. Other assets 21,027,849 10,292,557 Total assets 2,455,912,831 2,350,450,930 BALANCE SHEET - LIABILITIES Liabilities and shareholders' equity 30/06/2019 31/12/2018 10. Financial liabilities measured at amortised cost 2,060,937,166 1,985,601,291 a) due to banks 804,448,013 892,752,597 b) due to customers 1,102,568,290 796,149,883 c) securities issued 153,920,863 296,698,811 20. Financial liabilities held for trading 30. Financial liabilities designated at fair value 40. Hedging derivatives 50. Value adjustments of financial liabilities with macro-hedging (+/-) 84,064,131 73,788,761 60. Tax liabilities 183,929 107,822 a) current b) deferred 183,929 107,822 70. Liabilities associated with assets held for sale 80. Other liabilities 19,812,719 15,851,849 90. Employee severance benefits 3,180,535 3,162,656 100. Provisions for risks and charges: 7,469,812 6,556,576 a) commitments and guarantees given 1,736,004 581,369 b) pensions and similar obligations 3,469,693 3,287,261 c) other provisions for risks and charges 2,264,115 2,687,946 110. Valuation reserves (3,341,813) (10,517,063) of which relative to discontinued operations 120. Redeemable shares 130. Equity instruments 140. Reserves 71,390,348 51,189,025 Interim dividends 150. Share premium reserve 160. Share capital 204,508,690 204,508,690 170. Treasury shares (-) 180. Profit (Loss) for the period (+/-) 7,707,314 20,201,323 Total liabilities and shareholders’ equity 2,455,912,831 2,350,450,930 Income Statement INCOME STATEMENT Item 30/06/2019 30/06/2018 10. Interest and similar income 20,805,869 26,975,002 of which interest income calculated using the effective interest method 20. Interest and similar expense (7,392,387) (9,594,645) 30. Net interest income 13,413,482 17,380,357 40. Fee and commission income 27,227,557 29,326,570 50. Fee and commission expense (179,079) (207,629) 60. Net fee and commission income 27,048,478 29,118,941 70. Dividend and similar income 80. Net gains/(losses) on trading activities 90. Net gains/(losses) on hedging activities 1,195 4,150 100. Gains/(losses) on disposal or repurchase of: 499,612 a) financial assets measured at amortised cost 499,612 b) financial assets measured at fair value through other comprehensive income c) financial liabilities Net gains/(losses) of other financial assets and liabilities measured at fair value through profit 110. (92) and loss a) financial assets and liabilities designated at fair value b) other financial assets mandatorily measured at fair value (92) 120. Net banking and insurance income 40,463,063 47,003,060 130. Net value adjustments for credit risk: (7,956,922) (9,214,271) a) financial assets measured at amortised cost (7,932,366) (9,221,303) b) financial assets measured at fair value through other comprehensive income (24,556) 7,032 140. Gains/losses from contractual changes without derecognition (84,658) 150. Net gains/(losses) on financial operations 32,421,483 37,788,789 160. Administrative expenses: (20,646,726) (22,614,397) a) personnel expenses (12,937,138) (13,249,186) b) other administrative expenses (7,709,588) (9,365,211) 170. Net provisions for risks and charges (1,078,640) 643,437 a) commitments and guarantees given (1,154,635) 294,731 b) net other provisions 75,995 348,706 180. Net value adjustments on property, plant and equipment (913,887) (143,624) 190. Net value adjustments on intangible assets (474,809) (271,166) 200. Other operating income/expenses 644,799 329,777 210. Operating expenses (22,469,263) (22,055,973) 220. Gains(losses) from equity investments Net gains/(losses) from fair value measurement of intangible assets and property, plant and 230. equipment 240. Specific value adjustments on goodwill 250. Gains/(losses) on disposal of investments 12,000 260. Profit (Loss) from continuing operations before tax 9,952,220 15,744,816 270. Income taxes for the period on continuing operations (2,244,906) (4,523,952) 280. Profit (Loss) from continuing operations after tax 7,707,314 11,220,864 290. Profit (Loss) from discontinued operations after tax 300. Profit (Loss) for the year 7,707,314 11,220,864 Statement of comprehensive income STATEMENT OF COMPREHENSIVE INCOME Item 30/06/2019 30/06/2018 10. 10. Profit (Loss) for the year 7,707,314 11,220,864 Other income components after tax without reversal to income statement: 20. Equity securities at fair value through other comprehensive income Financial liabilities designated at fair value through profit and loss (changes in own credit 30. standing) 40. Hedging of equity securities at fair value through other comprehensive income 50. Property, plant and equipment 60. Intangible assets 70. Defined-benefit plans (294,614) 67,195 80. Non-current assets and disposal groups held for sale 90. Portion of reserves from valuation of equity investments carried at equity Other income components after tax with reversal to income statement: 100.
Load more

Recommended publications
  • Forward Contracts and Futures a Forward Is an Agreement Between Two Parties to Buy Or Sell an Asset at a Pre-Determined Future Time for a Certain Price
    Forward contracts and futures A forward is an agreement between two parties to buy or sell an asset at a pre-determined future time for a certain price. Goal To hedge against the price fluctuation of commodity. • Intension of purchase decided earlier, actual transaction done later. • The forward contract needs to specify the delivery price, amount, quality, delivery date, means of delivery, etc. Potential default of either party: writer or holder. Terminal payoff from forward contract payoff payoff K − ST ST − K K ST ST K long position short position K = delivery price, ST = asset price at maturity Zero-sum game between the writer (short position) and owner (long position). Since it costs nothing to enter into a forward contract, the terminal payoff is the investor’s total gain or loss from the contract. Forward price for a forward contract is defined as the delivery price which make the value of the contract at initiation be zero. Question Does it relate to the expected value of the commodity on the delivery date? Forward price = spot price + cost of fund + storage cost cost of carry Example • Spot price of one ton of wood is $10,000 • 6-month interest income from $10,000 is $400 • storage cost of one ton of wood is $300 6-month forward price of one ton of wood = $10,000 + 400 + $300 = $10,700. Explanation Suppose the forward price deviates too much from $10,700, the construction firm would prefer to buy the wood now and store that for 6 months (though the cost of storage may be higher).
    [Show full text]
  • D13 02 Pricing a Forward Contract V02 (With Notes)
    Derivatives Pricing a Forward / Futures Contract Professor André Farber Solvay Brussels School of Economics and Management Université Libre de Bruxelles Valuing forward contracts: Key ideas • Two different ways to own a unit of the underlying asset at maturity: – 1.Buy spot (SPOT PRICE: S0) and borrow => Interest and inventory costs – 2. Buy forward (AT FORWARD PRICE F0) • VALUATION PRINCIPLE: NO ARBITRAGE • In perfect markets, no free lunch: the 2 methods should cost the same. You can think of a derivative as a mixture of its constituent underliers, much as a cake is a mixture of eggs, flour and milk in carefully specified proportions. The derivative’s model provide a recipe for the mixture, one whose ingredients’ quantity vary with time. Emanuel Derman, Market and models, Risk July 2001 Derivatives 01 Introduction |2 Discount factors and interest rates • Review: Present value of Ct • PV(Ct) = Ct × Discount factor • With annual compounding: • Discount factor = 1 / (1+r)t • With continuous compounding: • Discount factor = 1 / ert = e-rt Derivatives 01 Introduction |3 Forward contract valuation : No income on underlying asset • Example: Gold (provides no income + no storage cost) • Current spot price S0 = $1,340/oz • Interest rate (with continuous compounding) r = 3% • Time until delivery (maturity of forward contract) T = 1 • Forward price F0 ? t = 0 t = 1 Strategy 1: buy forward 0 ST –F0 Strategy 2: buy spot and borrow Should be Buy spot -1,340 + ST equal Borrow +1,340 -1,381 0 ST -1,381 Derivatives 01 Introduction |4 Forward price and value of forward contract rT • Forward price: F0 = S0e • Remember: the forward price is the delivery price which sets the value of a forward contract equal to zero.
    [Show full text]
  • Eurodollar Futures, and Forwards
    5 Eurodollar Futures, and Forwards In this chapter we will learn about • Eurodollar Deposits • Eurodollar Futures Contracts, • Hedging strategies using ED Futures, • Forward Rate Agreements, • Pricing FRAs. • Hedging FRAs using ED Futures, • Constructing the Libor Zero Curve from ED deposit rates and ED Fu- tures. 5.1 EURODOLLAR DEPOSITS As discussed in chapter 2, Eurodollar (ED) deposits are dollar deposits main- tained outside the USA. They are exempt from Federal Reserve regulations that apply to domestic deposit markets. The interest rate that applies to ED deposits in interbank transactions is the LIBOR rate. The LIBOR spot market has maturities from a few days to 10 years but liquidity is the greatest 69 70 CHAPTER 5: EURODOLLAR FUTURES AND FORWARDS Table 5.1 LIBOR spot rates Dates 7day 1mth. 3mth 6mth 9mth 1yr LIBOR 1.000 1.100 1.160 1.165 1.205 1.337 within one year. Table 5.1 shows LIBOR spot rates over a year as of January 14th 2004. In the ED deposit market, deposits are traded between banks for ranges of maturities. If one million dollars is borrowed for 45 days at a LIBOR rate of 5.25%, the interest is 45 Interest = 1m × 0.0525 = $6562.50 360 The rate quoted assumes settlement will occur two days after the trade. Banks are willing to lend money to firms at the Libor rate provided their credit is comparable to these strong banks. If their credit is weaker, then the lending bank may quote a rate as a spread over the Libor rate. 5.2 THE TED SPREAD Banks that offer LIBOR deposits have the potential to default.
    [Show full text]
  • LIBOR Fallback and Quantitative Finance
    risks Article LIBOR Fallback and Quantitative Finance Marc Pierre Henrard 1,2 1 muRisQ Advisory, 8B-1210 Brussels, Belgium; [email protected] 2 University College London, London WC1E 6BT, UK Received: 19 April 2019; Accepted: 5 August 2019; Published: 15 August 2019 Abstract: With the expected discontinuation of the LIBOR publication, a robust fallback for related financial instruments is paramount. In recent months, several consultations have taken place on the subject. The results of the first ISDA consultation have been published in November 2018 and a new one just finished at the time of writing. This note describes issues associated to the proposed approaches and potential alternative approaches in the framework and the context of quantitative finance. It evidences a clear lack of details and lack of measurability of the proposed approaches which would not be achievable in practice. It also describes the potential of asymmetrical information between market participants coming from the adjustment spread computation. In the opinion of this author, a fundamental revision of the fallback’s foundations is required. Keywords: LIBOR fallback; derivative pricing; multi-curve framework; collateral; pay-off measurability; value transfer; ISDA consultations 1. Introduction Since their creation in 1986, LIBOR benchmarks1 have grown in importance to the point of being called in finance newspapers the most important number in the world. This was the case up to July 2017, when Bailey(2017), the CEO of the U.K. Financial Conduct Authority (FCA), indicated in a speech that there is an increased expectation that some LIBOR benchmarks will be discontinued in a not too distant future.
    [Show full text]
  • Liquidity Effects in Options Markets: Premium Or Discount?
    Liquidity Effects in Options Markets: Premium or Discount? PRACHI DEUSKAR1 2 ANURAG GUPTA MARTI G. SUBRAHMANYAM3 March 2007 ABSTRACT This paper examines the effects of liquidity on interest rate option prices. Using daily bid and ask prices of euro (€) interest rate caps and floors, we find that illiquid options trade at higher prices relative to liquid options, controlling for other effects, implying a liquidity discount. This effect is opposite to that found in all studies on other assets such as equities and bonds, but is consistent with the structure of this over-the-counter market and the nature of the demand and supply forces. We also identify a systematic factor that drives changes in the liquidity across option maturities and strike rates. This common liquidity factor is associated with lagged changes in investor perceptions of uncertainty in the equity and fixed income markets. JEL Classification: G10, G12, G13, G15 Keywords: Liquidity, interest rate options, euro interest rate markets, Euribor market, volatility smiles. 1 Department of Finance, College of Business, University of Illinois at Urbana-Champaign, 304C David Kinley Hall, 1407 West Gregory Drive, Urbana, IL 61801. Ph: (217) 244-0604, Fax: (217) 244-9867, E-mail: [email protected]. 2 Department of Banking and Finance, Weatherhead School of Management, Case Western Reserve University, 10900 Euclid Avenue, Cleveland, Ohio 44106-7235. Ph: (216) 368-2938, Fax: (216) 368-6249, E-mail: [email protected]. 3 Department of Finance, Leonard N. Stern School of Business, New York University, 44 West Fourth Street #9-15, New York, NY 10012-1126. Ph: (212) 998-0348, Fax: (212) 995-4233, E- mail: [email protected].
    [Show full text]
  • Frequently Asked Questions on the Basel III Standardised Approach for Measuring Counterparty Credit Risk Exposures, March 2018
    This standard has been integrated into the consolidated Basel Framework: https://www.bis.org/basel_framework/ Basel Committee on Banking Supervision Frequently asked questions on the Basel III standardised approach for measuring counterparty credit risk exposures March 2018 (update of FAQs published in August 2015) This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2018. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 978-92-9259-149-6 (online) Contents The standardised approach for measuring counterparty credit risk exposures: Frequently asked questions ............................................................................................................................................................................ 1 Introduction ......................................................................................................................................................................................... 1 1. General formula ............................................................................................................................................................... 1 1.1 Capping of margined EAD at otherwise unmargined EAD ................................................................... 1 1.2 Collateral taken outside of netting sets ........................................................................................................ 1 2. PFE add-on .......................................................................................................................................................................
    [Show full text]
  • MAFS601A – Exotic Swaps • Forward Rate Agreements and Interest Rate
    MAFS601A – Exotic swaps • Forward rate agreements and interest rate swaps • Asset swaps • Total return swaps • Swaptions • Credit default swaps • Differential swaps • Constant maturity swaps 1 Forward rate agreement (FRA) The FRA is an agreement between two counterparties to exchange floating and fixed interest payments on the future settlement date T2. • The floating rate will be the LIBOR rate L[T1, T2] as observed on the future reset date T1. Recall that the implied forward rate over the future period [T1, T2] has been fixed by the current market prices of discount bonds ma- turing at T1 and T2. The fixed rate is expected to be equal to the implied forward rate over the same period as observed today. 2 Determination of the forward price of LIBOR L[T1, T2] = LIBOR rate observed at future time T1 for the accrual period [T1, T2] K = fixed rate N = notional of the FRA Cash flow of the fixed rate receiver 3 Cash flow of the fixed rate receiver collect N+NK(T22 -T) fromT- maturitybond floating rate 2 LT,T[12 ]is reset at T1 reset date settlement date tTT12 collect N atT1 from T1-maturity bond; collect invest in bank N+NLT(,)12 T account earning (-)TT21 LTT[12 , ]rate of interest 4 Valuation principle Apparently, the cash flow at T2 is uncertain since LIBOR L[T1, T2] is set (or known) at T1. Can we construct portfolio of discount bonds that replicate the cash flow? • For convenience of presenting the argument, we add N to both floating and fixed rate payments.
    [Show full text]
  • Taxation of Financial Derivatives
    TAXATION OF FINANCIAL DERIVATIVES By Shefali Goradia* NISHITH DESAI ASSOCIATES** International Research Center A/201 Milton Apts., Juhu, Santacruz (West), Mumbai 400 049 India Chambers 93-B Mittal Court, Nariman Point, Mumbai 400 021 Tel: +91 22 282 0609 / 204 0068 Fax: +91 22 287 5792 Email: [email protected] Website: www.nishithdesai.com Nishith Desai Associates© 2 * Shefali Goradia is a member at Nishith Desai Associates, International Legal and Tax Counsellors. She is a Chartered Accountant, (Gold Medallist) 1991 along with B.Com. University of Bombay, Sydenham College of Commerce and Economics 1988. Her practice areas include International Taxation, Globalization, International Finance, Structuring of Inbound/Outbound Investments, Structuring of Offshore Funds, Taxation of EPC Contracts, Taxation of E-Commerce, Taxation of Insurance and Tax Planning for Entertainers. Some papers presented by her include "Non-Resident Indians" at the World NRI Forum Conference, 1996; "Structuring Offshore Funds for Investment in Indo-Asian Region," International Bar Association, 1997; "Foreign Investment into India — in comparison to China," OFC Asia Pacific Journal, December 1996, Campden Publications, London; "Setting Up Software Operations in India," The Indus Entrepreneurs (TiE) Conference, Santa Clara, April, 1998; "International Taxation of Software," International Tax Planning Conference, BMA, India, December, 1998. Taxation of e-commerce in India, Global Information Infrastructure Commission conference organized by CII & IL&FS, 1999, "Permanent Establishments and Business Profits", WIRC of Institute of Chartered Accountants of India, 1999. ** Nishith Desai Associates is an international legal and tax consultancy firm. It focuses on advanced legal practice, especially in the areas of globalization, international finance and tax laws, corporate laws and high technology & infrastructure law.
    [Show full text]
  • Interest Rate Hedging Compliance, Audit and Risk
    B O N N E V I L L E P O W E R A D M I N I S T R A T I O N BPA Policy 231-5 Interest Rate Hedging Compliance, Audit and Risk Table of Contents 1.1 Purpose & Background ............................................................................................................ 2 1.2 Policy Owner ............................................................................................................................. 2 1.3 Applicability ............................................................................................................................... 2 1.4 Terms & Definitions .................................................................................................................. 2 1.5 Policy ......................................................................................................................................... 5 1.6 Policy Exceptions ....................................................................................................................... 5 1.7 Responsibilities ......................................................................................................................... 5 1.8 Standards & Procedures ........................................................................................................... 7 1.9 Performance & Monitoring ..................................................................................................... 12 1.10 Authorities & References ...................................................................................................... 13 1.11
    [Show full text]
  • Information About Forward Rate Agreement –
    Information about Forward rate agreement – FRA This fact sheet provides general information about forward rate agreements traded through Danske Bank. AN OTC TRANSACTION WITH DANSKE BANK AS COUNTERPARTY. WHAT IS A FORWARD RATE A forward rate agreement (FRA) is an agreement between two parties that AGREEMENT (FRA) determines a future rate of interest with a single interest rate payment date. The FRA contract constitutes a tool in management of short-term interest rate risk. The contract base is generally 3-month XIBOR (STIBOR). The contract is often traded with standardized expiration days, i.e. IMM days. This means that liquidity is concentrated to a limited number of contracts. FRAs can be traded as a future admitted to trading on a regulated market or over-the-counter (OTC) with Danske Bank as the counterparty. Instruments admitted to trading on a regulated market are standardised. Strike rates, expiry dates and amounts are fixed by the regulated market, and specific procedures are in place for settlement of losses and gains at the end of each trading day. OTC transactions can be tailored to specific needs but may also be traded on standardised terms and conditions. This is the case when OTC transactions are derived from futures admitted to trading on a regulated market. Such transactions are settled exclusively on expiry. The buyer of an FRA hedges against rising interest rates at a future date (i.e. counterparty paying a fixed rate), while the seller hedges against falling interest rates (i.e. counterparty receiving a fixed rate). An FRA is settled by calculating the difference at the beginning of the interest period – based on the difference between the agreed interest rate and the current market rate for the period.
    [Show full text]
  • Forward Rate Agreements
    Product Briefing – Forward Rate Agreements A forward contract is economically equivalent to a futures contract in that it will involve the fixing of a price at the point of execution for delivery at some future date. An entity trading an over the counter forward will not be faced with the constraints of contract standardization that are a feature of exchange – traded contracts. Forwards allow the user greater flexibility in specifying deal parameters such as transaction size and maturity dates. Although something of a generalization the majority of forward contracts will be cash settled. So a cash settled bond forward would fix the price of the bond for future delivery but the final settlement would not require the exchange of the asset for cash. Instead the seller of the contract will pay a cash sum equal to the current market value of the bond and the buyer will pay the fixed price originally agreed upon. A forward deal is a contractual commitment which cannot be terminated unless both parties to the deal agree mutually to end the transaction. Forward Rate Agreements A forward rate agreement (FRA) is an over the counter (OTC) transaction that fixes a single interest rate for a single period, at an agreed date in the future. The start of the period the rate will be fixed for, and its length, is negotiated between the contract buyer and seller. So a FRA transaction that locks in the 3 month rate in 3 months’ time is referred to as a 3/6 or 3s6s transaction. The first number indicates the effective date of the transaction, the final number the maturity and the difference between the two indicates the tenor of the interest rate that is being fixed.
    [Show full text]
  • 1. Interest Rate Derivatives (FRA, IRS, Interest Rate Futures and Options
    FINANCIAL RISK MANAGEMENT AND DERIVATIVES [235221] 1. Interest Rate Derivatives (FRA, IRS, Interest Rate Futures and Options 1.1 Instruments Interest Rate Swap (IRS) is an agreement between two parties to exchange cash flows based on a specified amount of principal for a set length of time. IRS is a long term agreement. In Poland maturities reach 10 years (in the world up to 30 years). FRA (forward rate agreement) is a transaction in which two counterparties agree to a single exchange of cash flows based on fixed and a floating rate. A 3x9 FRA means a contract on a six-month WIBOR (in Poland) reference rate, three months forward. No payment will take place until floating rate six-month WIBOR is revealed after three months. In Poland settlement will take place in advance, eg. after 3 months. The share of the five most active banks in turnover accounts for almost 90 per cent. Most of transactions are speculative. Interest rate futures contracts are traded on organized exchanges. In the world interest rate futures (eurodollar, T-bills, T-note, T-bond, municipal bond) contracts represent more than one-half of the entire futures market. In Poland there is still very small interest in interest rate futures. The first IR futures on WIBOR in Poland were introduced by Warsaw Commodities Exchange in February 1999 and after short period these contracts disappeared. IR options are instruments which give the right to buy or sell interest rate sensitive instruments at a pre-determined interest rate. The price of the option is a premium paid on the second day after transaction.
    [Show full text]