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The rates of interest on the loan reprices every six months. The corporation is concerned that the interest rate may be much higher in 6 months. The corporation could purchase a forward rate contract (FRA), which is an agreement to pay a fixed rate of interest 6 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 reduce the uncertainty concerning the rate increase and support incomes. Derivatives can be used to obtain danger, instead of to hedge against threat. Therefore, some people and institutions will participate in a derivative agreement to hypothesize on the value of the underlying property, wagering that the celebration seeking insurance coverage will be wrong about the future worth of the underlying asset. https://260663.8b.io/page9.html |
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