Forward rate agreements (FRAs) can seem complex to the average person or even the beginning finance student, but to many business owners, it's critical to understand. Start by learning the basics including the definition of a forward rate agreement, or contract. Then learn when the agreements are most beneficial to use. A forward rate, simply put, is a contract for a short-term loan that usually lasts only a few months.

Once you understand the concept of forward rate agreements, get a better understanding of what situations the contracts are entered into. To find out if a forward rate agreement would work in your situation, spend some time learning the advantages and disadvantages of the contract. Practice calculating the forward rate balances and interest rates, and use these calculations to apply to your situation. Start by:

1. Looking up the forward rate agreements definition.

2. Doing some research through a forward rate training course or an online seminar.

3. Using online calculators to help you learn the forward rate calculation and how to adjust it.

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Use the definition of forward rate agreements to gain a basic understanding

The simplest way to learn about the forward rate agreement is to do some easy research. Learn the definition, basic uses and proper calculations that go with reaching an forward rate agreement. An FRA can be a simple solution to a short-term lending contract that benefits both the lender and borrower.

I recommend: Read the definition of FRA at Investopedia, and get a better understanding of how the contract lending works and what calculations are used at Riskglossary.com and BMO Capital Markets. Find out how to get the best contract rate with the time period that suits you best.

Find courses that teach forward rate agreements for beginners

Take an online course, or find a seminar that teaches forward rate agreements for beginners if you want some hands-on training and a more in depth knowledge of FRAs. Learn how to use FRAs to keep transactions off balance sheets, reduce transaction costs and at the same time accomplish the same thing it's lending counterpart would achieve.

I recommend: Take an online FRA course from the New York Institute of Finance, or register for the Money Market Training from Finance Trainer. The course includes an overview and explanation of forward rate agreements.

Use online forward rate agreements calculators to learn the basics

The easiest way to apply a forward rate agreement concept to your situation is to punch in some numbers using an online calculator to check your numbers. Compare your FRA options before you decide it's the route you want to go.

I recommend: Use the FRA calculator at Montego Data Limited by using the contract rate, beginning and end dates of the forward period and interest rate. You can also read more future rate agreements information including rate tables and calculations at Mecklai Financial.

Forward rate agreements (FRAs) are flexible loans that can be structured to mature on any date. Unlike traditional loans, there is no principal and the loan is settled at the established maturity date. Lenders make a profit from the difference between the agreed rate and the settlement rate at maturity. For example, a 3×9 FRA is a three-month forward on a six-month loan. The borrower begins payments in three months and will pay the balance in nine months.

FRAs are a viable option for cash managers or investors who want to alter their interest rate or cash flow profile. They should not be entered into without first researching forward rate agreements information or seeking forward rate agreements advice. It is also advisable to seek help with forward rate agreements from informational websites or a forward rate agreements consultant. The bottom line is that it's important to receive some rudimentary forward rate agreements training before entering into an FRA, and asking yourself the three questions below is a great place to start:

1. Do lenders maintain minimum FRA transaction amounts?

2. How are forward rate agreements payments calculated?

3. How can you learn more about how FRAs might benefit your business?

Action Steps
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Ask the lender if there are minimum transaction amounts on forward rate agreements

It is important to read the fine print where FRAs are concerned. Many, if not most, lenders place restrictions on minimum transaction amounts. Be sure to ask this of a lender before agreeing to the terms of any forward rate agreement.

I recommend: St. George Bank states on its FAQ page that its minimum FRA transaction amount is a million dollars. CSOB's minimum amount for an FRA transaction is the equivalent of 10 million euros.

Calculate a rough estimate of forward rate agreements payments

Forward rate agreements are generally calculated in Euros. The London Interbank Offer Rate (LIBOR) is the most common rate for borrowing or lending where FRAs are concerned and FRAs are primarily conducted by overseas lenders.

I recommend: Ciberconta's and Montegodata's FRA information page includes a "calculator" button which, once pressed, provides you with a screen from which to calculate estimated payments.

Seek forward rate agreements advice from a forward rate agreements expert

Seeking the services of a consultant or third-party expert is a great way to get advice regarding arranging an FRA where the terms are in your best interest.

I recommend: Allen & Overy's website claims it represents more than 800 corporate and financial institution participants in the financial markets. They have expertise in world-wide finance issues, FRAs being but a small part. Allied Irish Bank's (AIB) website details its FRA expertise and summarizes how it can arrange forward rate agreements between you and AIB as well as other lenders.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  If the details around forward rate agreements information still seems a bit confusing, consider reading a detailed book on the matter to help further your education on the subject.

Forward rate agreements are a corporate financial derivative tool that allow companies to receive flexible loans that have no principal and mature on a selected date. The lender makes money on the gap in the interest rate between the date of lending and the date of maturity.

Forward rate agreements are a great way to improve a company's cash profile, since the loan they receive has no principal attached to it when it is entered into the books. Enhancing the cash profile can help the company qualify for better traditional loans. Here are some places where you can stay up-to-date on the latest news and trends.

1. Find reputable financial newspapers which cover the business of forward rate agreements.

2. Read bank websites for the latest news on forward rate agreements.

3. Locate forums which specialize in finance and cover the topic of forward rate agreements.

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Locate financial publications which offer news on forward rate agreements

Because forward rate agreements are financial products that are not used by the day-to-day consumer, like CDs or savings accounts, locating information on the news about them can be a bit tricky. Find financial newspapers and publications which specialize in covering a multitude of financial products including forward rate agreements news and trends.

I recommend: Visit the website for Bloomberg.com. They are one of the foremost financial news resources in the world. Also, The Wall Street Journal covers the news and trends related to FRAs. For each website, simply type in "forward rate agreement" and a bevy of results will return.

Locate bank websites which release articles on the latest forward rate agreements news

Because forward rate agreements are primarily a corporate lending gap financing solution, search the corporate lending section of a reputable bank's website. There you'll find the latest rates as well as news and trends for the corporate lending industry as a whole and more specific information about forward rate agreements.

I recommend: Visit the website for Dresdner Bank. They offer articles and information on current pricing for forward rate agreements. Also, The Bank of New York Mellon publishes articles on news as well as current rates for forward rate agreements.

Check out forums which cover forward rate agreements

There are many finance forums which are dedicated to financial derivative products such as forward rate agreements. Locate credible forums, and more importantly, credible people within those forums when engaging in a discussion. Knowledge on news and trends can be gained by engaging with other financial professionals who know the latest rules, regulations and pricing in accordance with forward rate agreements.

I recommend: Visit the website for Bionic Turtle. They are a website which specializes in the training of risk and finance. They have several discussion forums which cover forward rate agreements. The Wilmott forum is also an excellent resource when it comes to discussions, news and trends of forward rate agreements.

A forward rate agreement (FRA) is a type of forward or futures contract that pays through a fixed interest rate. The contract can be renegotiated to include a variable interest rate for a better return. FRA contracts also help to determine the currency exchange rate between two currencies that will be paid from a specific start date to the termination date. The start and termination dates are established at some future point. An FRA contract comprises a large part of the Foreign Exchange (Forex) markets.

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Over-the-counter contract

An over-the-counter contract passes securities contracts 'over the counter' as opposed to buying and selling the same contracts on the floor of a stock exchange.

I recommend: Beginner Money Investing provides an overview of the over-the-counter market.

Currency exchange rate

The currency exchange rate is the value of one currency when exchanged into a different currency at a specific period of time. FRA contracts help to determine these exchange rates.

I recommend: Go Currency provides up-to-date currency exchange rates and information on the outlook of specific exchange rates for the U.S. dollar and other currencies around the world.

Notional value

Notional value is a term used in futures and currency markets to describe the total value of assets in a leveraged position. The notional value only requires a small amount of money for a large amount of leverage, but also provides larger risk.

I recommend: Investopedia provides an explanation of notional value and additional resources to learn its role in futures and Forex trading.

Foreign exchange, Forex

FRA contracts are a big part of foreign exchange markets because the contracts determine an exchange rate between currencies at a future point in time.

I recommend: Forex Capital Markets provides information on the benefits and risks of trading in Forex markets.

Fixed rate

A fixed rate is an interest rate that stays the same throughout a loan or contract. Most FRA contracts work with a fixed rate at the beginning of the contracts.

I recommend: Eagle Traders describes the amount of risk associated with fixed rate and floating (variable) rate investments in financial markets.

Variable rate

A variable rate on a contract or loan is a rate that is flexible and can be changed throughout the length of the contract according to market conditions.

I recommend: WiseGeek provides an expanded definition of a variable interest rate.