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The interest rate on the loan reprices every six months. The corporation is concerned that the rate of interest might be much higher in 6 months. The corporation might buy 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 difference to the seller. The purchase of the FRA serves to lower the unpredictability worrying the rate increase and stabilize revenues. Derivatives can be utilized to obtain threat, rather than to hedge against danger. Hence, some people and institutions will get in into an acquired contract to hypothesize on the worth of the underlying asset, wagering that the party looking for insurance coverage will be wrong about the future value of the underlying possession. https://juliuslhjc245.weebly.com/blog/some-known-details-about-what-is-a-warrant-in-finance |
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