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The rate of interest on the loan reprices every six months. The corporation is worried that the interest rate may be much greater in six months. The corporation could buy a forward rate agreement (FRA), which is an agreement to pay a set rate of interest six months after purchases on a notional quantity 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 unpredictability concerning the rate increase and stabilize incomes. Derivatives can be used to acquire threat, rather than to hedge against threat. Therefore, some people and organizations will participate in a derivative agreement to hypothesize on the worth of the underlying possession, betting that the party seeking insurance will be incorrect about the future value of the underlying possession. http://judahydao498.jigsy.com/entries/general/what-is-a-consumer-finance-company-questions |
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