The over-the-counter derivative product used to manage interest rate risk is a/an:
A) futures contract.
B) forward rate agreement.
C) yield rate agreement.
D) duration agreement.

Question

Quizplus · Accepted Answer

Forward rate agreements (FRAs) are over-the-counter derivative products that allow parties to manage their interest rate risk by fixing an interest rate for a future period. The buyer of the FRA receives compensation if the interest rate on the settlement date is higher than the fixed rate, while the seller receives compensation if the interest rate is lower than the fixed rate. Futures contracts (A) are standardized exchange-traded contracts, which may not be suitable for all hedging needs. Yield rate agreements (C) and duration agreements (D) are not commonly used over-the-counter derivative products to manage interest rate risk.

The Over-The-Counter Derivative Product Used to Manage Interest Rate Risk