Question

In an FRA, the buyer agrees to pay the seller

A. the increased interest cost on a notional amount if interest rates fall below an agreement rate.
B. Not Sure
C. the increased interest cost if interest rates increase above the agreement rate
D. the increased interest cost on a notional amount if interest rates rise above an agreement rate.

Answer 1

C.

A Forward Rate Agreement (FRA) is an OTC rate derivative in which the buyer will pay or receive at maturity the difference between a fixed rate and a reference interest rate applied onto either a borrowing or lending (the notional is never exchanged), for a specific period of time.