Forward Rate Agreements (FRA)
• Can be viewed as a forward contract to borrow / lend money at a certain rate at some future date.

Formula for payment to the long at settlement is:

(notional principal)* [{(floating rate-forward rate)*(days/360)}/{1+(floating rate)*(days/360)}]
Example

FRA that settles in 30 days, $1mn notional, Based on 90-day LIBOR, Forward rate of 5%, Actual 90-day LIBOR at settlement is 6%. Solution Î”I = (6% - 5%) * (90/360)*$1m = $2,500 PV= 2,500 / (1 + (90/360)*6%) =$2,463