Derivatives
Forward Rate Agreement
Definition
What is Forward Rate Agreement?
An agreement settling the difference between a contracted interest rateThe price of borrowing money or the return paid for lending it. and a market reference rate for a future period.
Example in practice
How This Looks in Practice
A borrower locks a three-month rate beginning six months from now.
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Related Terms
Derivatives
Derivative
A contract whose value depends on an underlying asset, rate, index, or event.
DerivativesUnderlying Asset
The asset, rate, index, or reference on which a derivative's value is based.
DerivativesNotional Amount
The reference amount used to calculate derivative payments, which may exceed the cash initially exchanged.
Derivatives StrategiesCovered Call
A strategy that owns the underlying asset and sells call options against it.