Which of the following statements concerning forward

Solution

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. An FRA is an agreement to exchange an interest rate commitment on a notional amount. FRA is essentially a forward-starting loan, but with no exchanges of principal, so that only the difference in interest rates is traded. An FRA is a forward-dated loan, dealt at a fixed rate, but with no exchange of principal – only the interest applicable on the notional amount between the rate dealt and the actual rate prevailing at the time of settlement changes hands. So FRAs are off-balance sheet (OBS) instruments. By trading today at an interest rate that is effective at some point in the future, FRAs enable banks and corporates to hedge interest rate exposure. They may also be used to speculate on the level of future interest rates.