Forward rate agreement, commonly known as FRA, is an over-the-counter contract between two parties, where the buyer agrees to pay a fixed interest rate to the seller for a predetermined period in the future. In return, the seller agrees to pay the buyer a floating rate, which is determined at the time of the agreement.

The FRA contract is a financial instrument used to hedge against interest rate risk. It provides protection for both the buyer and the seller against the uncertainty of future interest rates. The buyer can lock in a fixed interest rate, which protects them from any increase in interest rates in the future, while the seller can lock in a floating rate, which protects them from any decrease in interest rates.

The FRA contract is settled in cash, based on the difference between the agreed-upon fixed rate and the prevailing market rate at the time of settlement. The settlement usually takes place at the end of the predetermined period or earlier if the contract is terminated prematurely.

The FRA market is primarily used by banks and other financial institutions to manage their interest rate risk. It is also used by speculators and traders to profit from changes in interest rates. The FRA contract is available for various terms, ranging from a few days to several years.

In conclusion, Forward Rate Agreement (FRA) is a financial contract that allows two parties to protect themselves against interest rate risks. The buyer agrees to pay a fixed rate, and the seller agrees to pay a floating rate, which is determined at the time of the agreement. The FRA market is primarily used by banks and other financial institutions to manage their interest rate risk. It is a versatile financial instrument that provides a flexible way for the market participants to hedge their interest rate risk.