Interpreting derivatives and hedging disclosures. A recent report of the DaimlerChrysler Corporation contained the following note:

DaimlerChrysler manages risk arising from fluctuations in interest rates and currency exchange rates by using derivative financial instruments. DaimlerChrysler manages exposure to counterparty credit risk by entering into derivative financial instruments with highly rated institutions that can be expected to fully perform under the terms of such agreements. DaimlerChrysler does not use derivative financial instruments for trading purposes. . . . When DaimlerChrysler sells vehicles outside the United States or purchases components from suppliers outside of the United States, transactions are frequently denominated in currencies other than U.S. dollars. Periodically, DaimlerChrysler initiates hedging activities by entering into currency exchange agreements, consisting principally of currency forward contracts and purchases options, to minimize revenue and cost variation which could result from fluctuations in currency exchange rates. These instruments, consistent with the underlying purchase or sale commitments, typically mature within three years of origination. Fees paid for purchased currency options are deferred and included in other assets. The currency exchange agreements are treated as off-balance-sheet financial instruments, with the deferred fees and related gains and losses recognized in earnings upon the settlement of the underlying transactions.

a. What is "counterparty credit risk"?

b. Does DaimlerChrysler acquire derivatives in order to speculate in securities markets? How can you tell?

c. When DaimlerChrysler hedges to minimize revenue and cost variations, are these fair-value hedges or cash-flow hedges? How can you tell?

d. What justification can you give for DaimlerChrysler's policy of deferring fees paid to acquire purchased currency options?