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The rate of interest on the loan reprices every six months. The corporation is concerned that the rate of interest might be much greater in six months. The corporation could buy a forward rate arrangement (FRA), which is an agreement to pay a set interest rate 6 months after purchases on a notional quantity 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 uncertainty concerning the rate increase and stabilize profits. Derivatives can be used to get danger, rather than to hedge versus danger. Therefore, some individuals and organizations will participate in a derivative contract to speculate on the worth of the hidden possession, wagering that the celebration seeking insurance will be incorrect about the future worth of the hidden property. https://a.8b.com/ |
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