Forward-forward agreement


Forward-forward agreement

In business and contract law, a future-forward agreement (FFA) is a form of forward rate agreement in which party "A" agrees to lend party "B" the "m1" amount of money, at future time "t1". In return, "B" will pay to "A" a larger monetary amount "m2" at time "t2 > t1". The name "future-forward agreement" derives from the fact that both issuing and repayment of the loan take place in the future. A regular forward rate agreement lends the money at once. A quoted forward rate is associated with every future-forward agreement. This can be thought of as the interest rate earned by party "A" for lending the money to "B". []

Example

John goes to his bank today. He agrees to take out a loan of $10,000 from the bank in one year's time, and will pay back the loan with $10,800 in two years' time. The forward rate would be ($10,800/$10,000)-1=8%.

ee also

*Futures contract
*Forward contract
*Arbitrage

References


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