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Can you describe a set of derivative contracts in terms of an agreement to lease a car?

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vwaddic | Student, Undergraduate | eNotes Newbie

Posted June 22, 2013 at 3:11 AM via web

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Can you describe a set of derivative contracts in terms of an agreement to lease a car?

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Kay Morse | College Teacher | (Level 1) Senior Educator

Posted June 25, 2013 at 10:20 PM (Answer #1)

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The car dealer has an originating contract (Contract 1) with the car manufacturer to sell cars. A leaser has a contract (Contract 2) with the car dealer to lease one of the cars. The leaser's contract is derived from (is based upon) the dealer's original contract with the manufacturer. Therefore, since Contract 2 depends upon the prior existence of Contract 1, then Contract 2 is a derivative contract of Contract 1.

You might take this a step deeper and say that the manufacturer has a contract with the importer to distribute imported cars. In this case, the car dealer's distributive contract would be a derivative contract of the originating import/distribution contract, while the leaser contract would be a derivative of the car dealer's contract. In this case, there would be a set of derivative contracts: Contract 1, import/distribution; Contract 2 (derivative), Car dealer car sales; Contract 3 (derivative), leaser of car.

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Kay Morse

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