Fairmat Example

Forward Rate Agreement

A Forward Rate Agreement (FRA) is an over-the-counter agreement which a certain interest rate will be applied to a certain principal during a specified future period of time. If we suppose a trading date (t) this O.T.C. financial product fixes a FRA rate which will be payed between two future dates (from T1 to T2 or, better, from t + T1 to t + T2 as compared with time t). If the FRA rate equals the forward rate (Rf) starts from T1 with maturity T2-T1, the FRA is worthless, otherwise it can be positive or negative.