The notation for FRAs is unique. There are two numbers associated with an FRA: the number of months until the contract expires and the number of months until the underlying loan is settled. The difference between these two is the maturity of the underlying loan. For example, a 3 × 5 FRA is a contract that expires in three months (90 days), and the underlying loan is settled in five months (150 days). The price of the 3 × 5 FRA is calculated by annualizing the implied forward rate. The implied forward rate is calculated from the 3-month rate and the 5-month rate. |
