Forward Rate Agreements Pricing

A Forward Rate Agreement (FRA) is an interest rate forward purchase or sale contract.Under a FRA, the interest differential between the FRA contract rate and the market interest rate on the Settlement Date on the notional principal is paid or received.

In addition to the contract FRA rate valuation model requires the Future Rate (ie the futures interest rate from the settlement date to the final maturity date) and the Risk Free Interest Rate (ie the zero coupon government bond rate for the period from the valuation date to the final maturity date).

FRA's are over-the-counter (OTC) instruments which are typcially issued by investment banks to end users and are not traded on exchanges. Thus the terms fo the FRA can be set according to the end user's requirements but they tend to be illiquid as they can only be sold back to the issuing investment bank.

DerivativeOne features a free valuation tool for Forward Rate Agreements