A forward rate agreement (FRA): A. is settled by making a loan at the contract rate. B. can be used to hedge the interest rate exposure of a floating-rate loan. C. is risk-free when based on the Treasury bill rate.
An FRA settles in cash and carries both default risk and interest rate risk, even when based on an essentially risk-free rate. It can be used to hedge the risk/uncertainty about a future payment on a floating rate loan.
