or is acting as a speculator. In FRA trading, only the payment that arises because of the differ- ence in interest rates changes hands. There is no exchange of cash at the time of the trade. The cash payment that does arise is the difference in interest rates between that at which the FRA was traded and the actual rate prevailing when the FRA matures, as a percentage of the notional amount. FRAs are traded by both banks and corporations. The FRA market is liquid in all major currencies and rates are readily quoted on screens by both banks and brokers. Dealing is over the telephone or over a dealing system such as Reuters. The terminology quoting FRAs refers to the borrowing time period and the time at which the FRA comes into effect (or matures). Hence if a buyer of a FRA wished to hedge against a rise in rates to cover a 3- month loan starting in three months time, she would transact a "3- against-6 month" FRA, or more usually denoted as a 3´6 or 3v6 FRA. This is referred to in the market as a "threes-sixes" FRA, and means a 3-month loan beginning in three months time. So correspondingly, a "ones-fours" FRA (1v4) is a 3-month loan in one months time, and a "three-nines" FRA (3v9) is a 6-month loan in three months time. As an illustration, suppose a corporation anticipates it will need to borrow in six months time for a 6-month period. It can borrow today at 6-month LIBOR plus 50 basis points. Assume that 6-month LIBOR rates are 4.0425% but the corporations treasurer expects rates to go up to about 4.50% over the next several weeks. If the treasurers suspicion is correct, the corporation will be forced to borrow at higher rates unless some sort of hedge is put in place to protect the borrowing requirement. The treasurer elects to buy a 6v12 FRA to cover the 6-month period begin- ning six months from now. A bank quotes 4.3105% for the FRA, which the corporation buys for a £1,000,000 notional principal. Suppose that six months from now, 6-month LIBOR has indeed backed-up to 4.50%, so the treasurer must borrow funds at 5% (LIBOR plus the 50 basis point spread). However, offsetting this rise in rates, the corporation will receive a settlement amount which will be the difference between the rate at which the FRA was bought (4.3105%) and todays 6-month LIBOR rate (4.50%) as a percentage of the notional principal of £1,000,000. This payment will compensate for some of the increased borrowing costs.   FRA Mechanics In virtually every market, FRAs trade under a set of terms and conven- tions that are identical. The British Bankers Association (BBA) has com- piled standard legal documentation to cover FRA trading. The following standard terms are used in the market.     ■ Notional sum: The amount for which the FRA is traded.