The Underlying In A Forward Rate Agreement Is Most Likely A(N)

FRA are very liquid and can be traded in the market, but there will be a cash difference between the FRA rate and the prevailing price in the market. A term statement may be made either in cash or on a delivery basis, provided that the option is acceptable to both parties and has been previously defined in the contract. The FRA sets the rates to be used at the same time as the date of termination and the nominal value. FRA are settled in cash on the basis of the net difference between the interest rate of the contract and the market variable rate called the reference rate. The nominal amount is not exchanged, but a cash amount based on price differences and the nominal value of the order. A borrower could enter into a rate agreement in advance for the purpose of guaranteeing an interest rate if the borrower believes that interest rates may increase in the future. In other words, a borrower might want to set their cost of borrowing today by entering into a FRA. . . .