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The interest rate on the loan reprices every six months. The corporation is concerned that the rate of interest may be much higher in six months. The corporation could purchase a forward rate arrangement (FRA), which is a contract to pay a fixed rate of interest 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 concerning the rate increase and support revenues. Derivatives can be utilized to get danger, instead of to hedge versus risk. Hence, some people and organizations will get in into an acquired agreement to speculate on the worth of the underlying possession, betting that the party looking for insurance coverage will be incorrect about the future value of the underlying possession. https://penzu.com/p/aa157077 |
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