Forward Rate Agreement (FRA)

A forward rate agreement (FRA) is a widely used over-the-counter financial instrument where counterparties enter into a borrowing/lending arrangement for a notional amount at a rate agreed today but starting at a pre-agreed future date (typically six months forward). There is no exchange of principal and the contract is cash-settled at expiry (contracts typically run to a year). The borrowing counterparty is able to lock in a rate and has a hedge against rising rates. The lender, by contrast, is guaranteed a fixed return and is hedged against falling rates.