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Forward rate agreement (FRA)
An over-the-counter (OTC) forward contract on a short-term interest rate. The buyer of an FRA commits to pay a fixed rate of interest on some notional amount that is never actually exchanged. The seller of an FRA agrees notionally to lend a sum of money to a borrower at a floating interest rate. Only the difference in rates is actually settled on the effective date. FRAs can be used either to hedge interest rate risk or to speculate on future changes in interest rates.