The buyer of an appointment concludes the contract to protect himself from a future rise in interest rates. The seller, on the other hand, concludes the contract to protect himself from a future drop in interest rates. For example, a German bank and a French bank could enter into a semi-annual futures contract in which the German bank pays a fixed interest rate of 4.2% and receives the variable interest rate on the principal amount of 700 million euros. Settlement amount = interest difference / [1 + settlement rate × (days of contract term ⁄ 360)] Company A enters into a FRA with Company B, where Company A receives a fixed interest rate of 5% on a principal amount of $1 million per year. In return, Company B receives the one-year LIBOR rate, which is set at the principal amount in three years. The agreement will be settled in cash in a payment at the beginning of the term period, discounted by an amount calculated on the basis of the contract rate and the duration of the contract. If the billing rate is higher than the contractual rate, the FRA seller must pay the payment amount to the buyer. If the contractual rate is higher than the billing rate, the FRA buyer must pay the settlement amount to the seller. If the contractual rate and the billing rate are the same, no payment will be made. In other words, a forward rate contract (FRA) is a tailor-made, over-the-counter financial futures contract on short-term deposits.

An FRA transaction is a contract between two parties for the exchange of payments on a deposit, the so-called nominal amount, which must be determined on the basis of a short-term interest rate called the reference interest rate over a period of time predetermined at a future date. FRA transactions are recorded as a hedge against changes in interest rates. The buyer of the contract secures the interest rate in order to protect himself from an increase in the interest rate, while the seller protects himself against a possible fall in interest rates. At maturity, no funds exchange hands; On the contrary, the difference between the contracted interest rate and the market interest rate is exchanged. The buyer of the contract is paid if the published reference interest rate is higher than the contractually agreed fixed price, and the buyer pays the seller if the published reference interest rate is lower than the contractually agreed fixed price. A company that wants to hedge against a possible rise in interest rates would buy FRA, while a company that seeks to hedge against a possible interest rate cut would sell FRA. FRA are typically used to set an interest rate on transactions that will take place in the future. For example, a bank that plans to issue or renew certificates of deposit, but expects interest rates to rise, can guarantee the current interest rate by purchasing FRA. If interest rates rise, the payment received from fra should offset the increase in interest charges on CDs. When interest falls, the bank pays. For example, XYZ Company, which borrowed on the basis of variable interest rates, believed that interest rates are likely to rise. XYZ chooses to pay firmly all or part of the remaining term of the loan using a FRA (or a series of FRA (see interest rate swaps), while its underlying loan remains variable but guaranteed.

The FWD may result in the processing of the currency exchange, which would involve a transfer or settlement of funds to an account. There are times when a clearing agreement is entered into that would be concluded at the prevailing exchange rate. However, the settlement of the futures contract leads to the fact that the net difference between the two exchange rates of the contracts is offset. A FRA settles the cash flow difference between the interest rate differentials of the two contracts. FRA are not loans and do not constitute agreements to lend an unsecured sum of money to another party at a pre-agreed interest rate. Its nature as an IRD product only creates leverage and the ability to speculate or hedge interest rate exposures. As a hedge vehicle, FRAs are similar to short-term interest rate futures (ITRs). However, there are a few differences that set them apart. Many banks and large corporations will use FRA to hedge future interest rate or foreign exchange risk. The buyer protects himself against the risk of rising interest rates, while the seller protects himself against the risk of falling interest rates. Other parties using forward rate agreements are speculators who only aim to place bets on future changes in the direction of interest rates. [2] The development swaps of the 1980s offered organizations an alternative to FRA for hedging and speculation.

The forward rate agreement includes tailor-made interest rate contracts that are bilateral in nature and do not involve a centralized counterparty and are often used by banks and companies. In finance, a forward rate contract (FRA) is an interest rate derivative (IRD). In particular, it is a linear IRD with strong associations with interest rate swaps (IRS). Forward rate contracts are agreements between the bank and the borrower in which the bank undertakes to lend to the borrower at a specific interest rate agreed on an amount of nominal capital at a given time in the future. Fra determines the rates to be used, as well as the date of termination and the nominal value. FRA are settled in cash with the payment based on the net difference between the contract interest rate and the market variable interest rate, called the reference rate. .