FRA

The loan amount (the notional) is only a hypothetical amount used as a reference to calculate the future interest payable. Under this type of agreement, no principal is exchanged and the interest rate guarantee is dissociated from any lending or borrowing of the principal. On the settlement date, both parties compare the prevailing market interest rate to the agreed-upon rate and settle the interest rate differential. If the market rate exceeds the agreed-upon rate, the buyer of the forward rate agreement, who is usually also a borrower, receives payment from the seller. In the opposite case, the buyer pays the differential to the seller. The buyer is thus protected from an increase, and the seller from a decline, in interest rates.