More specifically, a bilateral forward contract that fixes the interest rate on the day of the agreement for payment at a future settlement date this can be up to two years later.įRAs are used to hedge against interest rate exposure in the sense that one of the parties pays a fixed rate and the other a variable rate. It is a contract for differences, settled on a single fixed date by reference to an agreed market reference rate.įRAs are used by corporates to hedge or transform short term interest rate exposures.įor example, an FRA can be used to effectively fix an interest rate for a borrowing to be drawn down at a future date.
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