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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Forward Rate Agreement (FRA)

Definition

A forward rate agreement (FRA) is an agreement to pay or receive, on an agreed future date, the difference between a fixed interest rate, agreed at the outset, and a reference interest rate actually prevailing on a given future date for a given period. A net cash settlement is made, calculated on the length of the agreed future period and an agreed notional principal amount. The reference rate taken for the interest rate in the future is generally the interbank offer rate at that time, such as LIBOR or some other international or domestic reference rate.

How is it used?

As with most instruments, a FRA can be used for hedging, speculation or arbitrage, depending on whether it is used to offset an existing ...

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