Forward Rate Agreement (FRA)

The buyer commits to pay the seller the contract

interest rate on the notional sum over the stipulated
period
The notional sum is neither borrowed or lend
It is used to
lock in borrowing rate
Lock in lending rate
Speculate on future levels of interest rates
It is an OTC version of interest rate futures

Forward Rate Agreement (FRA)

FRAs are used by banks for asset-liability

management
Used by corporates to hedge, arbitrage and
speculate on interest rates
Protection against interest rate fluctuation during a
short-term and for one term
FRA 3*6 means hedged for the period commencing 3
months and closing with 6 months

Forward Rate Agreement (FRA)

A bank agrees to lend three months hence US$ 100,000 @ 6%

for a period of six months

The bank does not lend to the buyer, on the settlement date (3
months from the contract date)

If the market rate is >6%, the bank pays the difference to the
buyer

If the market rate is <6%, the buyer compensates the bank for
the difference