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The rate of interest on the loan reprices every 6 months. The corporation is worried that the interest rate may be much higher in 6 months. The corporation could purchase a forward rate agreement (FRA), which is a contract 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 decrease the uncertainty concerning the rate boost and stabilize earnings. Derivatives can be utilized to get threat, instead of to hedge versus threat. Hence, some people and institutions will get in into an acquired contract to hypothesize on the value of the underlying asset, wagering that the celebration looking for insurance coverage will be incorrect about the future value of the hidden asset. https://penzu.com/p/86406593 |
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