Contingent Claims and Forward Commitments in Derivatives
Summary
The document distinguishes contingent claims from forward commitments, two categories of derivative contracts. A contingent claim has a payoff that depends on an underlying asset's value or another uncertain event; an option is the standard example because its holder has a choice whether to exercise. Vanilla swaps, forwards, and futures are described as forward commitments because both parties are committed to the contract's terms rather than holding that same exercise choice.
The explanation presents these categories as a terminology distinction, while noting that usage can vary: another answer treats contingent claims as a broader or nearly synonymous term for derivatives, including payoffs tied to credit events or corporate actions. The document gives definitions and examples, but no pricing method, empirical evidence, or detailed treatment of contract-specific cases. Readers should therefore use the relevant source's convention and check how a particular derivative's payoff is defined.
Key ideas
- A contingent claim's payoff depends on an underlying value or uncertain event.
- Options are presented as the prototypical contingent claims because they provide exercise choice.
- Vanilla swaps, forwards, and futures are classified as forward commitments under the cited distinction.
- Terminology may vary, and contingent claim can also be used more broadly for derivatives.
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Full text
# Contingent claim and Derivative # Contingent claim and Derivative What's the difference between a derivative and a contingent claim? What is an example of a derivative which isn't a contingent claim? Since options or swaps are examples of derivatives that are contingent claims. ## Answer by Quantuple (score 4, accepted) https://quant.stackexchange.com/a/38883 Quoting from wikipedia "In finance, a contingent claim is a derivative whose future payoff depends on the value of another “underlying” asset, or more generally, that is dependent on the realization of some uncertain future event. These are so named, since there is only a payoff under certain contingencies. Any derivative instrument that is not a contingent claim is called a forward commitment. The prototypical contingent claim is an option, the right to buy or sell the underlying asset at a specified exercise price by a certain expiration date; whereas (vanilla) swaps, forwards, and futures are forward commitments, since these grant no such optionality. Contingent claims are applied under financial economics in developing models and theory, and in corporate finance as a valuation framework." See also references quoted in the original article. This also seems to be the definition used by the CFA Institute (just google "contingent claim vs forward comittment" along with CFA keyword). So according to these definitions: - options, swaps, forwards/future contracts are all derivatives - options are contingent claims - (vanilla) swaps, forwards/future contracts are forward comittments ## Answer by user79168 (score 0) https://quant.stackexchange.com/a/38884 Usually a contingent claim is regarded as another name of derivatives. But it may be more generic. The payoffs of contingent claims may depend on other assets or some events, such as credit events, corporate actions, etc.
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