Forward Rate Agreements Key Terms

Learn about purchasing forward rate agreements

By Terri Deno

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.

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