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The interest rate on the loan reprices every 6 months. The corporation is concerned that the interest rate may be much higher in six months. The corporation might buy a forward rate contract (FRA), which is an agreement to pay a fixed interest rate six 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 lower the unpredictability worrying the rate increase and support incomes. Derivatives can be utilized to get danger, instead of to hedge against threat. Hence, some individuals and institutions will get in into a derivative agreement to hypothesize on the worth of the underlying asset, betting that the celebration looking for insurance will be wrong about the future value of the underlying asset. https://yenian73od.doodlekit.com/blog/entry/16663963/the-10second-trick-for-what-does-fy-mean-in-finance |
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