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The rates of interest on the loan reprices every 6 months. The corporation is worried that the rate of interest might be much greater in 6 months. The corporation might buy a forward rate contract (FRA), which is an agreement to pay a set rate of interest 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 reduce the uncertainty concerning the rate boost and support revenues. Derivatives can be used to acquire threat, instead of to hedge against risk. Hence, some people and institutions will get in into a derivative contract to hypothesize on the worth of the underlying asset, wagering that the celebration looking for insurance will be incorrect about the future value of the hidden possession. https://reidsazr.bloggersdelight.dk/2021/08/23/get-this-report-about-what-is-the-difference-in-perspective-between-finance-and-accounting/ |
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