What Is a Forward Rate Agreement (FRA)? Describe the Elements

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The Answer is A forward rate agreement (FRA) is the over-the-counter equivalent of the exchange-traded futures contracts on short-term rates. Typically, the short-term rate is LIBOR. The elements of an FRA are the contract rate, reference rate, settlement rate, notional amount, and settlement date. The parties to an FRA agree to buy and sell funds on the settlement date. The FRA's contract rate is the rate specified in the FRA at which the buyer of the FRA agrees to pay for funds and the seller of the FRA agrees to receive for investing funds. The reference rate is the interest rate used. For example, the reference rate could be three-month LIBOR or six-month LIBOR. The benchmark from which the interest payments are to be calculated is specified in the FRA and is called the notional amount (or notional principal amount). This amount is not exchanged between the two parties. The settlement rate is the value of the reference rate at the FRA's settlement date. The source for determining the settlement rate is specified in the FRA.

What Is a Forward Rate Agreement (FRA)? Describe the Elements

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What Is a Forward Rate Agreement (FRA)? Describe the Elements

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