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The interest rate on the loan reprices every 6 months. The corporation is concerned that the interest rate might be much higher in 6 months. The corporation could purchase a forward rate agreement (FRA), which is an agreement to pay a set interest rate six months after purchases on a notional amount of cash.
If the rate is lower, the corporation will pay the distinction to the seller. The purchase of the FRA serves to decrease the unpredictability worrying the rate increase and stabilize incomes. Derivatives can be used to obtain danger, instead of to hedge against threat. Therefore, some individuals and organizations will get in into an acquired contract to speculate on the worth of the underlying asset, wagering that the party seeking insurance will be incorrect about the future worth of the hidden possession. https://penzu.com/p/42a20449 |
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