A forward rate agreement (FRA) is a financial agreement between two parties, where they agree to exchange interest rate payments at a future date, based on a predetermined interest rate. In essence, it is a contract, where one party agrees to pay a fixed interest rate to the other party, who agrees to pay a floating interest rate at a future date. FRAs are commonly used in the financial industry to hedge against interest rate risks.

The FRA contract specifies the notional amount, settlement date, and the fixed rate. The notional amount is the amount of money on which the interest rate payments are based. The settlement date is the date on which the interest rate payments are settled. The fixed rate is the predetermined interest rate agreed upon by the parties.

FRAs provide parties with a way to manage interest rate risk, particularly in situations where borrowing or lending terms are expected to change in the future. Financial institutions use FRAs to hedge against interest rate fluctuations, and to manage their exposure to these fluctuations. They are popular in the derivatives market because they are easy to use, and allow parties to lock in an interest rate for a future date.

FRAs also play an important role in the interbank market. They are used to help banks manage their liquidity requirements, and to ensure that they have access to financing when needed. Banks typically use FRAs to hedge against interest rate risks, and to manage their exposure to market volatility.

In conclusion, an FRA is a financial agreement used by parties to exchange interest rate payments at a future date. FRAs are typically used to manage interest rate risks, particularly in situations where borrowing or lending terms are expected to change in the future. They are easy to use and have become popular in the derivatives market. FRAs play a crucial role in the interbank market, where they help banks manage their liquidity requirements and ensure that they have access to financing when needed.