Contingent claim securities are securities that give the holder a claim upon another asset contingent upon the holders meeting certain contract conditions. Although there are many types of contingent claim securities, the three most popular kinds of investments today are options, warrants and convertible securities.
An option is a contract giving its holder the right to buy or sell an asset or security at a fixed price. All options are valid only for specified time period, after which they expire. A call option gives its holder the right to buy the underlying asset and thereby guarantees the purchase price of the asset for the duration of the option. A put option carries the right to sell and guarantees the selling price of the underlying security.
Warrants are like call options that are issued by the corporation. They give their holders the right to purchase the common stock from the corporation at a fixed price. Warrants usually have longer life than options (typically five to seven years) although a few perpetual warrants do exist.
Convertible securities are securities that may be converted into common stock. A convertible bond is a bond that the holder may exchange for common stock of the corporation. The other common type of convertible security is the convertible preferred stock, which is simply a preferred stock that the holder can exchange for a certain number of shares of common stock of the corporation.
A contract that arranges for delivery and payment of an asset at a future date is a futures contract. Futures contracts are traded publicly on the futures exchanges, and these exchanges have developed contracts on a number of assets, such as corn, wheat, soyabeans and frozen pork bellies. These contracts, often called commodity futures because of the nature of the underlying asset, allow producers and consumers of the commodities to plan their production and sales in...
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