The-definition.com

Definition

Forward Rate Agreement

A forward rate agreement (FRA) is an interbank-traded contract to buy or sell interest rate payments on a national principal. These contracts are settled in cash. The buyer of an FRA obtains the right to lock in an interest rate for a desired term that begins at a future date. The contract specifies that the seller of the FRA will pay the buyer the increased interest expense on a nominal sum (the national principal) of money if interest rates rise above the agreed rate, but the buyer will pay the seller the differential interest expense if interest rates fall below the agreed rate. Maturities available are typically 1, 3, 6, 9 and 12 months, much like traditional forward contracts for currencies.

Share it:  Cite

More from this Section

  • Yield on a discount basis
    Yield on a discount basis is the measure of interest rates by which dealers in bill markets ...
  • Occurrence
    Occurrence refers an accident, including continuous or repeated exposure to substantially ...
  • Triangular arbitrage
    Triangular arbitrage in which currency transactions are conducted in the spot market to ...
  • Prepayment
    Prepayment is paying for goods at the time the order is placed and prior to receipt of ...
  • Guaranteed investment contract (GIC)
    Guaranteed investment contract (GIC) is an arrangement in private pension plans in which ...