Forward-forward agreement

Forward-Forward Agreement

Forward-forward agreement

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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 m<sub>1</sub> amount of money, at future time t<sub>1</sub>. In return, B will pay to A a larger monetary amount m<sub>2</sub> at time t<sub>2</sub> &gt; t<sub>1</sub>. 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%.

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