Forward Rate Agreement
Also written FRA · Forward Rate Agreement (FRA)
An interest rate derivative exchanging interest payments on a notional principal on a future date at agreed rates for a defined forward period.
This one is not written up yet
The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.
Written up from the same chapter
- ADR, GDR and IDRDepository receipts represent shares of a company in one country but trade on an exchange in another — American inside the US, Global outside it, Indian for foreign shares listed here.
- ArbitragerA participant who locks a profit by entering opposite transactions in two markets at once — carrying no exposure and taking no view, and in the process pulling the two prices back together.
- Central counterpartyThe clearing corporation that interposes itself in every exchange trade, becoming buyer to every seller and seller to every buyer, so neither side carries the other's credit risk.
- Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
- Credit Default SwapA contract in which a protection buyer pays a regular premium to a protection seller, who agrees to pay any loss in value on a specified reference obligation if a credit event such as default occurs.
- DerivativeA contract whose value is derived from the value of something else — the underlying — rather than from anything the contract itself owns or produces.
Where this is taught
- Series III-C · Chapter 1: Introduction to the Financial Systemintroduced here
- Series V-D · Chapter 19: Interest Rate Derivativesintroduced here
- Series IV · Chapter 2: Interest Rate Derivativesintroduced here
- Series III-A · Chapter 1: Introduction to the Financial Systemintroduced here
Related terms
- Forward rateThe interest rate for a period that starts in the future, implied today by two spot rates — because rolling a short investment must return the same as locking in a long one, or arbitrage follows.
- Interest rate swapAn agreement to exchange streams of interest payments on a notional principal for a set period — typically fixed against floating — where only the net difference ever changes hands.
- Notional principalThe reference amount interest is computed on in a swap, FRA or money market futures contract — it sizes the exposure and the settlement, but it is never exchanged.
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