Derivatives markets are classified into two categories: forward commitments and contingent claims.
Forward commitments are legally binding obligations that require the parties to engage in a specific transaction at a future date at a specific agreed upon price. Both the parties have obligations in the forward commitments. These trade both on exchange-traded markets and OTC markets. These instruments include forwards, futures, and swaps.
Contingent claims are derivatives securities where the payoff is conditional on the occurrence of some event. Without the occurrence of the event, these expire worthlessly. One party has the right and another party has the obligation in these instruments. These include options, asset-backed securities, and credit derivatives like credit default swaps.
Check your concepts:
(57.3) Which of the following is least likely to be a contingent claim?
(a) Swaps
(b) Credit derivatives
(c) Asset-backed securities
Solutions:
(57.3) Correct Answer is A: Swaps are forward claims. The credit derivatives and asset-backed securities are contingent claims as the payoff is dependent on the occurrence of some event.
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