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The rates of interest on the loan reprices every 6 months. The corporation is worried that the interest rate might be much higher in six months. The corporation might purchase a forward rate agreement (FRA), which is a contract to pay a set rate of interest six months after purchases on a notional quantity of cash.
If the rate is lower, the corporation will pay the difference to the seller. The purchase of the FRA serves to reduce the uncertainty concerning the rate increase and support profits. Derivatives can be utilized to acquire risk, instead of to hedge against danger. Thus, some people and institutions will get in into an acquired agreement to hypothesize on the worth of the underlying asset, betting that the celebration seeking insurance will be incorrect about the future value of the underlying property. https://keeganaron800.weebly.com/blog/the-definitive-guide-for-which-of-the-following-can-be-described-as-direct-finance |
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