An FRA is an agreement between the Bank and a Customer to pay or receive the difference (called settlement money) between an agreed fixed rate (FRA rate) and the interest rate prevailing on stipulated future date (the fixing date) based on a notional amount for an agreed period (the contract period).

In short, this is a contract whereby interest rate is fixed now for a future period.

The basic purpose of the FRA is to hedge the interest rate risk.

For example, if a borrower is going to borrow FC loan for 6 months at ARR rate after 3 months, he can buy an FRA whereby he can fix interest rate for the loan

FRAs can be used by customer who has a desire or need to alter their interest rate or cash flow profile to suit their particular needs. FRAs are used by customer looking to protect themselves from, or take advantage of, future interest rate movements.

A FRA can be arranged for one to six month terms, commencing up to 18 months from deal date.

By entering into a FRA Customer has expressed his view on interest rates. If interest rate movements be different to his expectations the FRA may have the opposite effect to what customer are trying to achieve with the transaction.

Customer can however, reverse or terminate the FRA.

It is a financial transaction in which two counterparties agree to exchange streams of cash flows throughout the life of contract in which one party pays a fixed interest rate on a notional principal and the other pays a floating rate on the same sum, popularly known as floating to fixed or fixed to floating IRS. IRS can also be floating to floating wherein either legs are floating.

The basic purpose of IRS is to hedge the interest rate risk of constituents and enable them to structure the asset/liability profile best suited to their respective cash flows.

When agreeing on an interest-rate swap, the bank and the customer trade variable and fixed rates. Under the interest rate swap the customer receives from the bank the variable rate of interest it owns under its loan(s) excluding any variable mark-ups, and subsequently pays a fixed rate as agreed under the interest rate swap to the bank. This set-up protects customer from increases in interest rates. Customer still has to pay any variable mark-ups and that these are not covered by interest-rate swaps.

Currency futures are standardized, exchange-traded contracts to buy or sell a currency at a specific price sometime in the future. As an essential tool to manage the risks associated with changing currency valuations, Currency futures allow market participants to lock in a currency rate for a specific time period.

At the same time, Currency futures offer a means of potential profits for those who wish to take a view on currency fluctuations, and in doing so accept the risk that businesses and financial institutions wish to offset with electronic trading and efficient risk management systems. Exchange traded currency future allow Corporate and Households alike to hedge their currency risk, to protect or increase investment returns and to trade in USDINR, EURINR, GBPINR and JPYINR without the need to have an underlying exposure.

It is an agreement between two parties to exchange obligations in different currencies at the beginning, during the tenure and at the end of the transaction. At the start, initial principal is exchanged, though not obligatory. Periodic interest payments (either fixed or floating) are exchanged throughout the life of the contract. The principal is exchanged invariably on termination at the exchange rate decided at the start of the transaction.

By means of currency swap, the counterparties can hedge their exchange rate and interest rate risk and also reduce the cost of funding.

In a currency swap operation, also known as a cross currency swap, the parties involved agree under contract to exchange the following: the principal amount of a loan in one currency and the interest applicable on it during a specified period of time for a corresponding amount and applicable interest in a second currency.

In a typical currency swap transaction, the first party borrows a specified amount of foreign currency from the counterparty at the foreign exchange rate in effect. At the same time, it lends a corresponding amount to the counterparty in the currency that it holds. For the duration of the contract, each participant pays interest to the other in the currency of the principal that it received. Upon the expiration of the contract at a later date, both parties make repayment of the principal to one another.

Currency swaps are often used to exchange fixed-interest rate payments on debt for floating-rate payments; that is, debt in which payments can vary with the upward or downward movement of interest rates. However, they can also be used for fixed rate-for-fixed rate and floating rate-for-floating rate transactions.

The benefits for a participant in such an operation may include obtaining financing at a lower interest rate than available in the local market, and locking in a predetermined exchange rate for servicing a debt obligation in a foreign currency.

It is a contract between the bank and its customers in which the customer has the right but not obligation to buy/sell a specified amount of underlying asset at fixed price within a specific period of time, but has no obligation to do so. In this contract, the customer has to pay specified amount upfront to the counterparty which is known as premium.

This is in contrast of the forward contract in which both parties have a binding contract.

The right to sell a security is called a 'Put Option', while the right to buy is called the 'Call Option'. Option Contract can be used to :

Making profit from changes in price of the underlying assets without investing in the same.

Option contract can also be used to safeguard from fluctuations in the price of underlying assets buying or selling the underlying assets at a pre-determined price for a specified period of time.

MTM gains and losses on options are adjusted against the available liquid margins. The net option value is computed using the closing price of the option and are applied the next day.

European Options - European options are options that can be exercised only on the expiration date. All index options traded at NSE are European Options.

In- the- money options (ITM) - An in-the-money option is an option that results in gain if it is exercised immediately.

At-the-money-option (ATM) - An at-the money option is an option that that results in no profit no loss situation if it is exercised immediately.

Out-of-the-money-option (OTM) - An out-of- the-money Option is an option that results in loss if it were exercised immediately.

Union Bank of India also works as a bank cum Primary Dealer. The Bank provides facility to its valued customers (companies, corporate bodies, firms, institutions, provident funds trusts, regional rural banks, urban cooperative banks and non-banking financial companies) access to invest in Government Securities as allowed by Reserve Bank of India for non-competitive bidding.

Treasury Branch advises to the Corporates/NBFCs on their Bond issuance and also undertaking Debt Syndication activity by participating in the Bonds/Debentures of Public Sector Undertakings / Financial Institutions / NBFCs / Corporates. In order to leverage the existing relationship with the clients Treasury may facilitate their CPs/Bond issuance through existing outreach in the market.