- CFA Exams
- CFA Level I Exam
- Study Session 16. Derivatives
- Reading 49. Basics of Derivative Pricing and Valuation
- Subject 4. Forward Rate Agreements

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**CFA Practice Question**

In what way is the payoff of a forward rate agreement (FRA)

*most likely*different from the payoff of an interest rate option?A. It is paid immediately when the contract expires.

B. It is based on a fixed exercise rate.

C. It is based on a notional principal amount.

**Explanation:**The payoff of a FRA is paid immediately when the contract expires. If at expiration the option is in-the-money and exercised, the payoff of an option is not paid immediately at expiration; it is paid at the end of the term of the underlying interest rate.

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