Management Notes

Management Notes

Reference Notes for Management
The derivative deposit created by a bank results in-

The derivative deposit created by a bank results in-

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The derivative deposit created by a bank results in-

    1. a decrease in the total stock of money
    2. an increase in the total stock of money
    3. an increase in government securities
    4. none of the above

Correct Answer: an increase in the total stock of money

Answer Explanation

The creation of derivative deposits by a bank results in an increase in the total stock of money, although this might not be immediately apparent.

As part of derivative contracts, parties exchange funds or assets. Banks often require counterparties to deposit funds or collateral to support derivative transactions. In most cases, these deposits are made in cash or other highly liquid assets that are regarded as part of the money supply.

In spite of the fact that the derivative contract itself is not directly included in the traditional money supply, the funds or assets deposited to facilitate the contract contribute to it.

Furthermore, derivative transactions can result in profits or gains for one party and losses for another. If one party earns a profit, they may decide to keep these gains as part of their money holdings, further adding to the money supply.

While derivative contracts themselves do not directly increase money supply, the funds, assets, and potential gains associated with them collectively increase it.

Why the other options are not correct

a. A decrease in the total stock of money

The creation of derivative deposits does not lead to a decrease in the total stock of money. As outlined above, these transactions involve counterparties depositing funds or assets, which contribute to the money supply. Consequently, option (a) is incorrect for derivative deposits.

c. An increase in government securities

Government securities are usually bonds or other debt instruments issued by the government to raise money. A derivative deposit is not necessarily linked to an increase in government securities. Despite the fact that government securities can be used as underlying assets in derivative transactions, the amount of government securities held does not increase as a result of their creation.

d. None of the above

Due to the impact of derivative transactions on the money supply, option (b) “an increase in the total stock of money” is not the correct answer. Based on the explanation, option (d) “none of the above” is not the correct answer. As explained, other options do not accurately reflect derivative deposit outcomes.

Conclusion

In conclusion, the correct answer is indeed (b) “an increase in the total stock of money.” Although derivative contracts themselves might not directly contribute to the traditional money supply, their funds, assets, and potential gains together contribute to the broader money supply.

In order to understand the intricate workings of financial markets and their broader implications for the economy, one must understand how derivative transactions interact with the money supply.

Which is known as the most profitable asset of the bank?

Bibisha Shiwakoti
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