A forward rate agreement (FRA) is an over-the-counter contract where one party agrees to borrow or lend a specific amount at a fixed interest rate at a future date. This instrument helps parties hedge against interest rate fluctuations and can minimize foreign currency risks, though they carry higher risks than futures contracts and can be challenging to close early. Overall, FRAs offer advantages such as off-balance-sheet treatment while exposing users to potential difficulties if the market conditions change drastically.

1. By:-
eFinanceManagement.com
https://efinancemanagement.com/investment-decisions/forward-rate-agreement-meaning-
features-example-and-more
Forward Rate Agreement

2. 1. Introduction
2. Features
3. How it Works?
4. Objective
5. Advantages & Disadvantages
6. Reference
Content

3. In FRA, one user agrees to lend or borrow to another a specific amount of money at a future date and at a fixed rate.
The buyer enters into an FRA to get protection from any future rise in the interest rate. The seller enters into FRA to get
protection from dropping interest rates.
Introduction

4. 1. Over the counter contracts
2. Contracts remain notional
3. Borrower benefits when the rates go up
4. Lender benefits when the interest rates are on a downward trend.
5. Linear derivative instruments
Features

5. In FRA, the user lending an amount has a short position, while the borrower has a long position. If the FRA rate is more
than the LIBOR rate, then the borrower has to pay the lender for the difference in the interest rate. And, if the FRA rate
is less than the LIBOR rate, then the borrower could effectively get money at less than the market rate.
How it Works?

6. • To lock in the interest rate for the future and save the adverse impact of fluctuations in the interest rate.
• To lock-in the price of short-term security.
• Used to minimize foreign currency risks.
Objective

7. Advantages:
• Helps the parties to reduce their risk of any borrowing and lending in the future from unfavorable market movements.
• They are off balance sheet items, thus, have no impact on financial ratios.
Disadvantages:
• Carry a higher amount of risk than futures contracts.
• In case a party wants to close the contract before maturity, then it may be difficult to find another party if the original
party isn’t willing to do that.
Advantages & Disadvantages

8. Reference
To know more about it, click on the link given below:
https://efinancemanagement.com/investment-decisions/forward-rate-agreement-meaning-features-example-and-more