Settlement: Settlement of an FRA is on a net basis and can occur on the start date or the maturity date. This exchange allows for conversion of variable rate funding to fixed rate exposure or fixed rate funding to variable rate exposure. In a generic FRA one party pays fixed and the other party pays floating.
Only interest flows are exchanged and no principal is exchanged. Effectively, an FRA is a short-term, single-period interest rate swap. A forward rate agreement (FRA) is a contract between two parties to exchange interest payments on a specified notional principal amount for one future period of predetermined length (i.e., one month forward for three months).
