Abstract

Foreign exchange derivative (FED) is a speculation instrument engineered for the customer to trade risks of exchange loss (exchange risks) with risks created by the contract (contract risks) with a bank. The present study investigated whether the written explanation of the bank about the risks created to the customer by the contract can be qualitatively comprehended by ordinary adults in 30s and 40s of age. The degree to which the participants qualitatively comprehended the risks involved in the contract was objectively measured after they read the conditions of the FED contract and one of four different types of explanation about the possible outcomes of the same contract. The participants also imagined themselves as customers suggested of the FED contract by a bank and decided whether or not to enter into the contract. The participants showed enhanced comprehension of risks created by fluctuations of the market exchange rates (exchange risks) when they read the type of thorough explanation specifying all risks involved with the contract. However, for the risks created by the contract (contract risks), the comprehension of the participants who read the thorough explanation was not at all superior to that of the participants who read no explanation at all about the contract. On the other hand, the participants who read the explanation specifying only the exchange risks with no mention about the contract risks showed inferior overall comprehension of the contract compared to the participants who read no explanation at all about the contract. The explanation about the contract without a mention of the contract risks may not only reduce the comprehension of the contract conditions but also create false understanding of the contract to the customers. Finally, the participants with poor comprehension of the contract conditions were more likely to decide to enter into the contract than were the participants with high levels of comprehension.