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The rate of interest on the loan reprices every six months. The corporation is worried that the interest rate might be much greater in 6 months. The corporation could purchase a forward rate agreement (FRA), which is an agreement to pay a fixed interest rate 6 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 decrease the uncertainty worrying the rate increase and support earnings. Derivatives can be used to obtain risk, rather than to hedge against threat. Thus, some individuals and organizations will enter into a derivative contract to hypothesize on the value of the underlying property, betting that the celebration looking for insurance coverage will be wrong about the future worth of the hidden asset. https://cesarbvus898.over-blog.com/2021/08/what-does-ebit-stand-for-in-finance-for-dummies.html |
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