Question

Critically discuss the main features of Eurocredits and Forward Rate Agreements

Answer 1

Ans ) Euro credit : euro credit refer to laon whose denominated currency is not the lending Bank National currency the concept is closely linked to that of euro currency , which is any held or traded outside it's country of issue .

Advantages of euro credit : main advantage of taking loans in foreign currencies is the possibility of profit resulting from favourable exchange rate during the term of contract .

Disadvantages of euro credit : euro credit has many hidden defects which makes it risky for people who do not make money in the currency in which they want to take out a loan . people who do not have a stable income should analyze their financial situation due to existing defects .

Currency exchange rate : price of a given currency expressed in another currency may be beneficial on the day of loan is taken , however it may change drastically at any time to the disadvantage of borrower .

Political situation of country : depending upon authorities and political system then existing and change that occurred during the term of the loan agreement can undergo an absolute transformation.

Forward rate agreement : is an agreement between two parties who went to protect themselves against future movement in interest rate .by entering into an FRA Parties lock in an interest rate for a specific period of time starting on afuture settlement date , based on a specific notional principal amount.

Advantages of FRA

• Borrowing ( lending ) business is protected against an excessive rise in interest rates by a guarantee maximum rate.
• No early repayment or even renegotiate of underlaying credit agreement with Bank.
• Simple and easy to process.
• Easy to manage , recorded off balance sheet of business.

Disadvantages of FRA

• No possibility of benefiting from a favourable interest rate fluctuations between the determination and the settlement date.
• Separation from the underlaying loan meaning that the hedging continue to be effective even if underlaying no longer exists .

???? thanks , keep smiling , keep learning