Characteristics of forward rate agreements

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f. describe the characteristics of forward rate agreements (FRAs);

A forward rate agreement or FRA is similar to a forward contract. Its payoff is based on an interest rate.

FRAs are typically based on rates like LIBOR or Euribor, quoted as an annual rate.

The underlying is for a specified term, such as 90 day LIBOR, 180 day Euribor etc.

One peculiarity of the FRA market is that it pays the amount due on the contract on the day of interest rate ascertainment. But the rate quoted in the market is for payment after the period specified with interest.

So, in general an FRA on an m-day interest pays off at expiration but the payoff is discounted for m days at the m-day rate.