future rate agreements (1)

A future rate agreements (FRA)is essentially a contract between parties to lock in a given interest rate starting at some given point in the future for given time period .this instrument originated in the early 1970s and often referred to as a forward-forward .(it is also sometimes referred to simply as a forward rate contract.)The procedure was modified in the mid-1980s through the development of cash-compensation process whereby compensation is paid for deviations of the market interest rate from the contracted rate rather than through the actual borrowing or lending of funds between the two contract participants .The process works as follows : the two contracting parties agree on a particular lending or borrowing rate at some future date for specific amount and loan period.For example,Ms.Jones may wish to secure the interest rate on a $10000 loan in three months for a period of nine months.After negotiating through a broker over the future rate ,a contact will be signed between jones and the seller of the contract (Mr.brown)whereby a loan rate of 7.5 percent is locked in for time period under consideration .this contract guarantees the interest rate for both parties but does not involve any commitments for the loan itself .