Financial Jargon Buster Dictionary

This glossary is provided for information only and is not regulated by the Financial Services Authority.

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Forward Rate Agreement (FRA)

A contract for borrowing or lending at a stated interest rate over a stated period that begins at some time in the future. FRAs are used by parties wishing to protect themselves against future interest-rate movements.

In finance, a forward rate agreement (FRA) is a forward contract in which one party pays a fixed interest rate, and receives a floating interest rate equal to a reference rate (the underlying rate). The payments are calculated over a notional amount over a certain period, and netted, i.e. only the differential is paid. It is paid on the effective date. The reference rate is fixed one or two days before the effective date, dependent on the market convention for the particular currency. FRAs are over-the counter derivatives. A swap is a combination of FRAs.

The payer of the fixed interest rate is also known as the borrower or the buyer, whilst the receiver of the fixed interest rate is the lender or the seller.