- CFA Exams
- 2022 Level II
- Study Session 16. Derivatives
- Reading 48. Derivative Markets and Instruments
- Subject 4. Contingent Claims
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Subject 4. Contingent Claims PDF Download
A contingent claim is a derivative contract with a payoff dependent on the occurrence of a future event. It can be either exchange-traded or over-the-counter.
- The primary types of contingent claims are options. The payoff of an option is contingent on the occurrence of an event.
- Other types of contingent claims involve variation of options, often combined with other financial instruments or derivatives.
- Many corporations issue convertible bonds, which are bonds that can be exchanged for the stock of the issuing firm at a pre-agreed time and exchange ratio. The bondholder has an option to participate in gains on the market price of the firm's stock without having to participate in losses on the stock.
- Callable bonds are redeemable by the issuer before the maturity under specific conditions and at a stated price. The issuer has an option to pay off the bonds before maturity.
- Warrants are securities entitling the holder to buy a proportionate amount of stocks at some specified future date at a specified price. They are similar to call options.
- Exotic options are options that are more complex than basic put or call options. Exotic options trade over-the-counter.
- Interest rate options are options whose underlying asset is an interest rate.
- Options on futures are options whose underlying asset is a futures contract. They are all exchange-traded.
- Asset-backed securities are securities that are collateralized by a pool of securities such as mortgages, loans or bonds. Typically borrowers of mortgages, loans or bonds have the prepayment option to pay off their debts early.
- Many corporations issue convertible bonds, which are bonds that can be exchanged for the stock of the issuing firm at a pre-agreed time and exchange ratio. The bondholder has an option to participate in gains on the market price of the firm's stock without having to participate in losses on the stock.
Learning Outcome Statements
b. contrast forward commitments with contingent claims;c. define forward contracts, futures contracts, options (calls and puts), swaps, and credit derivatives and compare their basic characteristics;
CFA® 2022 Level II Curriculum, , Volume 6, Reading 48
User Contributed Comments 4
User | Comment |
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BunnyBaby | Types of Contingent Claims Derivative based (contingent) on the a future event taking place. (if the event takes place then {}) Most common types of contingent claims are options contracts and variations thereof Seller= receives premium in exchange for obligations Buyer= receives options to exercise rights by giving the premium Popular variations of options: Convertible bonds- can be exchanged for stock in the firm at a pre-agreed time and exchange ratio. Callable bonds- redeemable before the maturity at a stated price, issuer can pay off bonds prior to maturity Warrants- holder may buy a proportionate amount of stock at x time and at x price Exotic= OTC and complex Interest rate options- underlying asset is an interest rate Options on futures- underlying asset is a futures contract Asset-backed securities- collateralized by a pool of securities mrtgages, loans or bonds, borrowers of the loans have prepayment option |
mpapwa22 | Wow...Bunnybaby...nice summary of summary....cool |
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