Forward Rate Agreements - F.R.A.

A simple way to protect yourself against sizeable fluctuations in the interest rate market is to enter into an interest rate agreement with the bank for a certain amount of time.

A forward rate agreement (FRA) is a contract between the bank and the company. The bank provides the company in advance with an agreed rate on loans and investments, regardless of how the market fluctuates during the period.
 
The settling of an FRA contract takes place at the start of the loan period. This is done via a deposit or a payment. This amount and the market rate provide the agreed interest rate.
 
Advantages
The interest rate agreement is of interest to companies that would like to avoid the uncertainty when renewing a loan with floating rates (STIBOR based rates). By entering into an interest rate agreement, the company can set an upper limit for the interest rate on future loan renewals (excluding margins) and also a lower limit for planned investments.
 
Major player
DNB Markets is one of the major players in the FRA market in Norway and enters into contracts in a variety of currencies. An interest rate agreement usually has a maturity of up to two years.