An IRG is best described as:

• A. An option on a FRA agreed between two parties
• B. A fixed-rate loan
• C. An exchange-traded futures contract with interest rates
• D. A currency swap

Answer: (A)

At the heart of this item is a derivative that gives the holder the right, but not the obligation, to enter into a forward rate agreement (FRA) at a pre-set rate. An FRA is a contract between two parties to set the interest rate to be paid or received on a notional amount in the future. When you have an option on that FRA, you’re buying the right to initiate that FRA later if market rates move in a favorable way, providing flexibility to hedge or speculate on interest-rate movements.

This fits best because it describes a specific OTC instrument: an option on a FRA agreed between two parties. It’s not a fixed-rate loan, so it isn’t simply borrowing at a set rate for a period. It isn’t an exchange-traded futures contract either, since FRAs and their options are typically over-the-counter agreements rather than standardized exchange products. And it isn’t a currency swap, which involves exchanging principal and interest payments in different currencies.

So the correct description is an option on a forward rate agreement agreed between two parties.