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there was a point given in the BPP text which i could’t understand could you please explain the follwing point-
note – FRA is not identical to currecny forwards but it is not an agreement directly linked to a transaction instead it is a deravative agreement that fixes the interest rate on the notional amount of money?
DOUBT – what does the above point means when it says FRA is not directly linked to a transaction ? does it means whether to FRA agreement is executed or not does it depend on us?
As I explain in my free lectures, an FRA is an agreement to fix the interest rate on a fixed amount of borrowing or depositing. It is true that there does not have to be a separate transaction that requires there to be borrowing or depositing, but the note you quote is not really relevant for the exam because the financial manager will use FRA’s when there is a transaction involving borrowing or depositing.