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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
Identify the Definition of a Derivative
Answer
A derivative is a financial instrument that derives its value from the performance of an underlying asset, index, or rate. It serves as a contract between two parties and is used for various purposes such as hedging against risks or speculating on future price movements.
Step 2
Evaluate Each Option
Answer
To determine which option correctly defines a derivative, we can analyze each choice:
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(A) This option describes a forward contract or foreign exchange agreement, which is a type of derivative.
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(B) This option refers to credit assessment rather than a derivative instrument.
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(C) This is related to hedging but does not define a derivative directly; it describes protection against foreign government actions.
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(D) This option describes a form of payment method like credit but again does not define a derivative.
Based on this evaluation, option (A) accurately represents a derivative.
Step 3