What is Forward rate agreement?

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Accepted Answer

A forward rate agreement (FRA) is a financial contract between two parties to exchange interest rate payments based on a specified notional amount and a predetermined interest rate.

FRA is a derivative contract where one party agrees to pay a fixed interest rate while the other party agrees to pay a floating interest rate based on a notional amount.
It helps in hedging against interest rate risk by locking in a future interest rate.
FRAs are typically settled in cash at the beginning of the contract period based on the difference between the agreed-upon rate and the prevailing market rate.
Example: Company A enters into a 6-month FRA with Company B to hedge against rising interest rates. If the agreed rate is 5% and the market rate at settlement is 6%, Company B pays Company A the difference.
FRAs are commonly used in the financial industry to manage interest rate exposure.

What is Forward rate agreement?

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