Forward Rate Agreements and Interest Rate Forwards

A forward rate agreement (FRA) locks in today the interest rate applicable to a future borrowing or lending period. It is the simplest rate derivative — a contract to exchange a fixed payment for a floating payment at a single future date, with no optionality. Yet the FRA embeds all the essential no-arbitrage logic of rate derivatives: the forward rate as the rate that makes the FRA worth zero today, the forward price of a zero-coupon bond, and the forward DV01 as the sensitivity of a forward position to yield changes. Mastering FRAs builds the foundation for understanding interest rate swaps (which are strips of FRAs) and rate futures (where the daily settlement changes the no-arbitrage pricing).