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The interest rate on the loan reprices every 6 months. The corporation is concerned that the rate of interest may be much greater in six months. The corporation might buy a forward rate agreement (FRA), which is a contract to pay a set interest rate six months after purchases on a notional amount of money.
If the rate is lower, the corporation will pay the distinction to the seller. The purchase of the FRA serves to reduce the uncertainty worrying the rate boost and support incomes. Derivatives can be utilized to obtain danger, rather than to hedge against danger. Thus, some individuals and institutions will get in into a derivative agreement to hypothesize on the value of the underlying asset, wagering that the celebration looking for insurance will be incorrect about the future worth of the underlying possession. http://marcoghkg177.yousher.com/things-about-how-to-increase-cash-flow-personal-finance |
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