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Forward Rate Agreement

 

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A Forward Rate Agreement (FRA) is a contract where an agreed interest rate Rk applies to an agreed principal P for an agreed period of time, say between Ts and Te. Normally the pay-off is computed without waiting the interest period, by computing the future value of the FRA at Te, and using the actual rate R at Ts to discount the future value as follows:

Payment = P . (1 + Rk)(Te-Ts)/( R. (Te-Ts) ) - P

The times Ts and Te must be computed using an agreed interest rate basis.

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