A contingent claim is another term for a derivative with a payout that is dependent on the realization of some uncertain future event. Common types of contingent claim derivatives include options and modified versions of swaps, 澳洲幸运5开奖号码历史查询:forward contracts, and 澳洲幸运5开奖号码历史查询:futures contracts. Any 澳洲幸运5开奖号码历史查询:derivative instrument that isn't a contingent claim is called a 澳洲幸运5开奖号码历史查询:forward commitment.

Vanilla swaps, forward and futu𓃲res are all considered forward commitments. These are relatively rare, making options the most common form of contingent claim derivative.

Rights and Obligations

In a contingent claim, one party to the contract receives the right—not the obligation—to buy or sell an 澳洲幸运5开奖号码历史查询:underlying asset from another party. The 澳洲幸运5开奖号码历史查询:purchase price is fixed over a specific period or timeframe andꦅ will eventually expire.

By creating a right and not an obligation, the contingent claim acts as a form of insurance against 澳洲幸运5开奖号码历史查询:counterparty risk.

Options

The payoff for all financial options is contingent on the underlying asset or securit♚y reaching a target price or satisfying other specified conditions of the contract. The most common contingent claim transaction is an option traded on an option exchange. In these cases, the contingent claim is standardized to facilitate speed of trade.

For example, suppose a stock is trading at $25. Two traders agree to aꦅ contract. Trader One sells a contingent claim that stipulates they will pay Trader Two if the stock is trading at $35 or above, after one year. If the stock is trading at less than $35, Trader Two receives nothing.

Trader Two's claim is obviously contingent on the option's stated $35 strike price. Because the financial contract is being agreed to today—and not a year from now—the second trader will pay the first trader for the right to that future claim.

In essence, Trader Two is betting that the price of the underlying stock will be higher than $35 in a year when the contract expires. Trader One is betti🐼ng that the price will be less than $35 in a year.