Question

Briefly discuss the following statement: “If interest rates decline, the buyers of both a Forward Rate Agreement (FRA) and interest rate futures contract will benefit”.

Answer 1

The Buyer of an FRA locks in an interest rate for Borrowing in advance, Hence when the Interest rates decline, the Buyer of the FRA loses out.

The Buyer of the Interest rate futures (Treasury Futures or Eurodollars Futures) buys the bonds in advance, Thus when the interest rates decline the Treasury bonds increase in price thereby benefitting the buyer.

So, the above statement is incorrect as only the buyer of the Interest rate futures benefit from a decline in Interest rates.