If a lender agrees to lend a firm $1,000,000 after six months at the going rate, that individual can hedge against the loss from a decline in interest rates by

Question

Quizplus · Accepted Answer

By buying a financial futures contract, the lender can lock in the current interest rate and effectively hedge against a decline in interest rates. This means that if interest rates do decrease, the lender will still be able to earn the same return as they would have if they had made the loan at the current rate. Selling a futures contract or taking a short position would not provide the same level of protection as buying a futures contract. Making the loan now would not allow the lender to benefit from any potential increases in interest rates over the next six months.

If a Lender Agrees to Lend a Firm $1,000,000 After