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%.
See also
- Futures contract
- Forward contract
- Arbitrage
