Forward Rate Agreements (FRA) are over-the-counter contracts between parties that determine the rate of interest to be paid on an agreed-upon date in the future. FRA's can be used by companies to hedge their interest rates risk, or by investors who want to lock in a certain rate of return.The most common type of FRA is a fixed-for-floating contract, where one party agrees to pay a fixed interest rate for a period of time, and the other party agrees to pay the floating market rate on an agreed upon date. This type of agreement can be useful for companies who want to protect themselves from rising interest rates, since they will know exactly what their payments will be for a set period of time.However, FRA's can also be used by investors as leverage; for example, if an investor expects interest rates to rise in the future, they could enter into an agreement today where they agree to pay a fixed interest rate now in exchange for receiving the higher floating market rate at some point in the future. This would allow them to benefit from any increase in rates without having actually invested any money up front.
