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The rates of interest on the loan reprices every six months. The corporation is concerned that the interest rate might be much greater in six months. The corporation might purchase a forward rate contract (FRA), which is an agreement to pay a set interest rate 6 months after purchases on a notional amount of money.
If the rate is lower, the corporation will pay the difference to the seller. The purchase of the FRA serves to decrease the unpredictability worrying the rate boost and stabilize revenues. Derivatives can be used to obtain danger, rather than to hedge versus risk. Hence, some individuals and organizations will participate in an acquired agreement to hypothesize on the value of the underlying property, betting that the party seeking insurance will be wrong about the future worth of the underlying asset. https://writeablog.net/logiusczs1/whether-it-is-helpful-for-two-entities-to-get-in-into-an-interest-rate-swap |
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