A forward rate agreement (FRA) is an interest-rate derivative used to determine the cost of borrowing or the return on lending for a future period. The parties agree in advance on a rate, a notional amount and the period to which the arrangement applies. Once that period begins, the agreed rate is compared with a reference market rate. Usually, only the resulting interest difference is paid in cash; the notional principal is not transferred. FRAs are used to manage exposure to changes in short-term interest rates.
Source: European Central Bank (ECB) (source). This glossary entry is an independently worded adaptation of the cited information.