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The forward rate agreement (FRA) serves as a hedge for both the seller, who wants to secure a fixed lending rate, and the buyer, who is interested in a fixed borrowing rate. Focusing on the seller's perspective, the FRA is a derivative contract where the seller aims to lock in a 4% annual interest rate. The notional amount, referenced for payoff purposes, is $100 million, but no principal is exchanged. The fixed rate will initiate in three years, functioning effectively as a forward loan that covers the specified lending term.