In business

Business

A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...

 and contract law, a future-forward agreement (FFA) is a form of forward rate agreement

Forward rate agreement

In finance, a forward rate agreement is a forward contract, an over-the-counter contract between parties that determines the rate of interest, or the currency exchange rate, to be paid or received on an obligation beginning at a future start date. The contract will determine the rates to be used...

 in which party A agrees to lend party B the m₁ amount of money, at future time t₁. In return, B will pay to A a larger monetary amount m₂ at time t₂ > t₁. The name "future-forward agreement" derives from the fact that both issuing and repayment of the loan take place in the future. A regular forward rate agreement lends the money at once. A quoted forward rate

Forward rate

The forward rate is the future yield on a bond. It is calculated using the yield curve. For example, the yield on a three-month Treasury bill six months from now is a forward rate.-Forward rate calculation:...

 is associated with every future-forward agreement. This can be thought of as the interest rate

Interest rate

An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...

earned by party A for lending the money to B.

Example

John goes to his bank today. He agrees to take out a loan of $10,000 from the bank in one year's time, and will pay back the loan with $10,800 in two years' time. The forward rate would be ($10,800/$10,000)-1=8%.