The forward contract is the most essential rate management product. The Forward Rate Agreements (FRA) is found to be the determination of the gain or loss of the interest rate (Beets, 2004). In the FRA systems borrowers or lenders within the single future data are explored to interest rate risk, the FRA in a series is priced different rate unless the term structure is flat. The limitation of this method is that there is more risk involved in the interpretation.
The future contract is considered as a process that provides with considerably lesser risk. It is used in cases where there is a need to lessen the liquidity risk or default risk owing to the inclusion of the intermediary.
Another method that is considered is the swap. This is an exchange of the interest rate swap and looks like a combination of the FRA and involved the agreement of the counterparties to a set of future cash flow. The most common kind of interest rate is the plan vanilla swap.
Options are another method of interest rate management. These are known the option contract. This is used to address the underlying security of the debt obligation. It is found that the instruments are useful for the protection of the parties involved in the floating rate loan. In addition, this is known as the adjustable-rate mortgage. There is a grouping of the interest rate calls that are referred as the interest rate cap. Furthermore, this is a combination of the interest rate that is referred as the interest rate floor. The general cap is a call and the floor is a put. Therefore, Swaptions, embedded options and caps are used in this process.