Question:
1. Some financial instruments qualify as derivatives. Which of the following is the best description of a derivative?
A. A contract that derives its value from some other index, item, or security.
B. A contract that may happen but is not guaranteed to happen.
C. A contract made by two parties but which directly impacts a third party
D. A contract denominated in two different currencies.
2. On November 1, Year One, the Jeter Company signs a contract to receive one million Japanese yen on February 1, Year Two, for $10,000 based on the three-month forward exchange rate at that time of $1 for 100 Japanese yen (1,000,000 x 1/100 or $10,000). Why would Jeter obtain this contract?
A. Jeter believes the value of the Japanese yen will be increasing in relation to the value of the US dollar
B. Jeter believes the value of the Japanese yen will be decreasing in relation to the value of the US dollar.
C. Jeter believes that the economy of Japan will be growing at a rate faster than that of the US economy.
D. Jeter could be hedging a future need to make a payment in Japanese yen or it could be speculating that the Japanese yen will become more valuable.