A contingent claim is one whose existence depends on some event taking place. For example, if your little brother is first on the waiting list for admission at State U, he has a contingent claim on his place in next year’s freshman class. If all high school seniors accepted to the school choose to attend, your brother is out of luck. However, if at least one prospective freshman elects to go to college elsewhere, your brother can put the school’s sticker on the rear window of his car. In this case the contingency is the decision of at least one accepted senior not to attend. Options fall within this definition. For an option, the contingency is the decision of the option’s owner to exercise it. If the owner does not exercise the option, it will expire worthless. On the other hand, by exercising the option, the owner will have a claim on the securities the option covers.
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