What does Forward Rate Agreement- FRA mean?
Forward Rate Agreement (FRA) is the agreement between two parties that determines the currency exchange rate or the rate of interest to be paid or received at the end of the term of the agreement. Such an agreement is entered into by the parties wherein the rates at the termination of the contract is pre-determined. It is also called as a Future Rate Agreement.
Futures Knowledge Explains Forward Rate Agreement- FRA
For example, Company ABC and Company XYZ enter into a Forward Rate Agreement whereby Company ABC receives a fixed rate of 7.5% for one year on a principal of $1 million in three years and Company XYZ receives the one-year LIBOR rate, determined in three years' time, on the principal amount. If, after three years' time, the LIBOR is at 8%, the settlement to the agreement will require that Company ABC pay Company XYZ because the LIBOR is higher than the fixed rate.