Forward rate agreements (FRAs)

In short

• An FRA is an OTC contract to apply a fixed interest rate to a notional amount for a future period from A to B. The notional is never exchanged.
• The long FRA (buyer) pays fixed and receives floating MRR; the short receives fixed and pays MRR.
• The no-arbitrage fixed rate is the implied forward rate $IFR_{A,B-A}$, so the FRA is worth zero to both parties at inception.
• Net payment for the long at B: $(MRR_{B-A} - IFR_{A,B-A}) \times \text{Notional} \times \text{Period}$. FRAs settle at A, so discount it at $MRR_{B-A}$ for the period.
• Fixed payers are protected against rising rates (e.g. floating-rate borrowers); fixed receivers against falling rates. An FRA is a one-period swap.