An FRA is an agreement between two parties to exchange a fixed rate for a floating rate at a future date for a specific amount of money over a specific duration.
For example, a company proposes to borrow USD 10 million after three months for a tenure of six months. It agrees to pay the lender 1 percent over the six-month Libor prevailing on the date of drawdown of the loan. Since the reference rate is a floating rate, the company is not able to determine its interest cost today. To overcome this uncertainty, it could buy an FRA (3 v/s 9). In the contract, the FRA seller agrees to pay the company interest at the rate at which it would eventually be required to pay on its loan (but without the spread). In exchange, the company agrees to pay the FRA seller a fixed rate that is determined today. The company is, therefore, able to lock down its future interest cost today.
In the above example, the buyer of the FRA has borrowed effectively at a rate at which it concludes the FRA plus the spread of 1 percent, since the FRA seller will compensate or be compensated for the difference in the rate between the FRA rate and the relevant spot Libor rate determined three months hence.