contingent claim risk

can someone please give me a definition of contingent claim risk and an example? i know it applys to calable bonds/ mbs and even pention plans that are underfunded but i cannot find an actual definition anywhere in the books/web. also if you could give me an example of which party suffers this risk in a quick exmple, i would be greatful.

thanks and goodluck!


rates fall - bond is called at call price - limits price appreciation and proceeds have to be invested in a lower rate environment.

think of it as reinvestment risk :slight_smile:

They have a right to take back your asset and give you money back. For callables at par, for mbs it comes in form of return of principal via refinances etc.

does contingent claim risk also relates to putable bonds?

Well in a way, but with putables, the contingent claim is a benefit to the owner. The issuing entity is the one who has contingent claim risk because you can put the bond back to them at par when interest rates rise


Company’s portfolio include: putable bonds, equities and treasuries, and AAA floating rate bonds.

What risks does the company face?

(Choose between: interes rate risk, contingent clain risk, cash flow risk, cap risk)

Interest rate risk in treasuries is partially offset by the putables and income from floating rate. Also rising equities helps offset this too.

No contingent claim risk

Some cash flow risk and cap risk with the floating bonds