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The tutorial explains how a forward rate agreement (FRA) acts as a hedge for both the seller and the buyer of the contract. From the seller's perspective, who aims to secure a fixed lending rate, the counterparty is the buyer seeking to establish a fixed borrowing rate. The example uses a notional amount of 100 million dollars, emphasizing that this amount is not a loan but serves as a reference for the agreement's payoff. The FRA stipulates a fixed rate of 4% per annum, which the seller wishes to lock in. This fixed rate will commence in three years, functioning as a forward loan.