Lesson 1 of 5 · 12 min
Swaps versus a series of forward rate agreements
An interest rate swap is like a strip of FRAs on consecutive periods, except that every period uses one constant fixed rate instead of a different implied forward rate for each period.
In short
- A swap exchanges a series of future cash flows; a forward (including an FRA) is a single exchange on one future date.
- Both settle the net difference between a fixed rate agreed at inception and a market reference rate (MRR) set later, on a notional amount for a stated period.
- Shared features: firm commitment, symmetric payoff, no cash exchanged upfront, value of zero at inception, and counterparty credit risk.
- Differences: an FRA settles once, usually at the start of its interest period; a standard swap settles periodically, at the end of each period.
- A series of FRAs has a different fixed rate per period (each one's implied forward rate); a swap has one constant fixed swap rate for all periods.
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