What is a derivative?
(A) An agreement to buy a foreign currency at an agreed price on some day in the future
(B) An assessment of the reliability of a customer's capacity to make timely payments
(C) A method of protecting the business against seizure of its assets by a foreign government
(D) A method of payment that allows a buyer to gain access to goods immediately and promise to pay later - HSC - SSCE Business Studies - Question 12 - 2010 - Paper 1
Question 12
What is a derivative?
(A) An agreement to buy a foreign currency at an agreed price on some day in the future
(B) An assessment of the reliability of a customer's ... show full transcript
Worked Solution & Example Answer:What is a derivative?
(A) An agreement to buy a foreign currency at an agreed price on some day in the future
(B) An assessment of the reliability of a customer's capacity to make timely payments
(C) A method of protecting the business against seizure of its assets by a foreign government
(D) A method of payment that allows a buyer to gain access to goods immediately and promise to pay later - HSC - SSCE Business Studies - Question 12 - 2010 - Paper 1
Step 1
A) An agreement to buy a foreign currency at an agreed price on some day in the future
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Answer
This statement describes a forward contract, which is indeed a type of derivative. Derivatives are financial contracts whose value depends on the price of an underlying asset. In this case, the foreign currency is the underlying asset.
Step 2
B) An assessment of the reliability of a customer's capacity to make timely payments
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Answer
This option does not describe a derivative. It relates to credit risk assessment, which is not linked to the concept of derivatives.
Step 3
C) A method of protecting the business against seizure of its assets by a foreign government
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This statement refers to protective legal measures or insurance but does not define a derivative. Derivatives are not primarily about asset protection from government action.
Step 4
D) A method of payment that allows a buyer to gain access to goods immediately and promise to pay later
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Answer
This option describes trade credit or a form of financing, not a derivative. Derivatives specifically relate to contracts and underlying assets, not payment mechanisms.
