Let's now turn to forward rate agreements or RAs.

An FRA is an over the counter contract that allows two parties to lock in a projected interest rate for a future period.

It's an interest rate derivative.

There's no exchange of principle, just a single cash settlement at the start of the forward period.

There are four key components to understand when looking at an FRA, the notional, the forward period, the tenor, and the FRA rate.

Let's start with the notional.

This is the amount used to calculate the cash settlement.

No notional is actually exchanged.

It's simply the basis for determining how much one party owes to the other depending on how market rates evolve.

Next is the forward period.

This is the time between the trade date and the settlement date of the forward.

In other words, when the interest rate exposure actually begins, then we have the tenor.

This refers to the length of the interest rate exposure.

Once the forward period starts, it's usually three or six months, and it corresponds to the underlying eye B rate, for example, three month your eyeball.

This is sometimes called the run of the FRA.

Finally, there's the FRA rate.

This is the agreed upon forward rate fixed at the inception of the trade on the settlement date.

This fixed rate is compared to the actual eyeball fixing to determine who pays whom and how much.