Forward Rate Agreements
A forward rate agreement (FRA) is a forward contract in which one party pays a fixed interest rate, and receives a floating interest rate equal to a reference rate (the underlying rate).
The payments are calculated over a notional amount over a certain period, and netted, i.e. only the differential is paid. It is paid on the effective date. The reference rate is fixed zero, one or two days before the termination date, dependent on the market convention for the particular currency. FRA’s are over-the counter derivatives.