loan) is paid when the loan matures. Under a FRA then, the settlement sum payable should, if it was paid on the same day as the cash market interest charge, be exactly equal to this. This would make it a perfect hedge. As we noted above though, FRA settlement value is paid at the start of the contract period, that is, the beginning of the underlying loan and not the end. Therefore, the settlement sum has to be adjusted to account for this, and the amount of the adjustment is the value of the interest that would be earned if the unadjusted cash value were invested for the contract period in the money market. The settlement value is given by the following expression:     settlement value = (r - r )´M ´(nB ) ---------------------------------------------------------------- 1+ [rref´(nB )]     where   rref = the reference interest fixing rate rFRA = the FRA rate or contract rate M = the notional value n = the number of days in the contract period B = the day-count basis (360 or 365).   The expression for the settlement value above simply calculates the extra interest payable in the cash market, resulting from the difference between the two interest rates, and then discounts the amount because it is payable at the start of the period and not, as would happen in the cash market, at the end of the period.     In our hypothetical illustration, as the fixing rate is higher than the contract rate, the buyer of the FRA receives the settlement sum from the seller. This payment compensates the buyer for the higher borrowing costs that they would have to pay in the cash market. If the fixing rate had been lower than 5.75%, the buyer would pay the difference to the seller, because the cash market rates will mean that they are subject to a lower interest rate in the cash market. What the FRA has done is hedge the interest rate exposure, so that whatever happens in the market, the buyer will pay 5.75% on its borrowing. A market maker in FRAs is trading short-term interest rates. The settlement sum is the value of the FRA. The concept is exactly as with trading short-term interest-rate futures; a trader who buys a FRA is run- ning a long position, so that if on the fixing date the reference rate is