Forward rate agreement
In finance, a Forward Rate Agreement (FRA) is a contract under which an agreed interest rate Rk applies to an agreed principal P for an agreed period of time, say between Ts and Te. Normally the pay-off is computed without waiting out the interest period, by computing the future value of the FRA at Te, and using the actual interest rate R at Ts to discount the future value as follows:
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\operatorname{Payment} = P \left( \frac{(1+R_k)(T_e-T_s)}{R (T_e-T_s)} -1 \right)
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The times Ts and Te must be computed using an agreed interest rate basis.
See also: option, interest rate swap, financial future
