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The rates of interest on the loan reprices every 6 months. The corporation is worried that the rate of interest may be much higher in six months. The corporation might purchase a forward rate contract (FRA), which is a contract to pay a set interest rate six months after purchases on a notional quantity of money.
If the rate is lower, the corporation will pay the difference to the seller. The purchase of the FRA serves to reduce the unpredictability worrying the rate increase and support incomes. Derivatives can be used to obtain threat, rather than to hedge against risk. Thus, some individuals and institutions will get in into an acquired contract to hypothesize on the value of the underlying possession, wagering that the party seeking insurance coverage will be wrong about the future worth of the underlying asset. http://messiahnrjg515.simplesite.com/450325685 |
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