A forward rate agreement (FRA) is a financial contract between two parties, where one party agrees to pay a fixed interest rate on an agreed upon notional amount, while the other party agrees to pay a floating interest rate on the same notional amount, for a specified future time period. Essentially, a FRA is an agreement that helps two parties manage interest rate risk.

But what is the FRA equivalent to? Well, we can think of an FRA as being equivalent to a forward contract for interest rates. Similar to a forward contract for currency or commodities, a FRA sets a price at which two parties will exchange a financial asset at a predetermined future date.

Additionally, we can also think of a FRA as being equivalent to an interest rate swap. The difference between the two lies in the fact that a FRA is typically used to hedge interest rate risk for a specific time period, while an interest rate swap is used to swap floating and fixed interest rates over a longer period of time.

In other words, a FRA helps two parties lock in a future interest rate, much like a forward contract, while an interest rate swap allows for the exchange of interest rate payments over a longer period of time.

So why are FRAs important? For one, they can help businesses manage interest rate risk, which can be particularly important in industries that are highly sensitive to interest rate fluctuations, such as banking and finance. Additionally, FRAs can provide a form of insurance against potential changes in interest rates that could negatively impact a business`s bottom line.

In conclusion, a forward rate agreement can be thought of as equivalent to both a forward contract for interest rates and an interest rate swap. They are important financial instruments that can help businesses manage interest rate risk and provide a form of insurance against potential interest rate fluctuations.