Review article
Basic characteristics of option contracts and options
Zvonimir Slakoper
Josip Štajfer
Abstract
In domestic business practice and economic literature the concept of options and option contracts has been more and more often present in recent years. In Croatian legal literature options are almost not mentioned, while in Croatian regulations options and option contracts are mentioned only conceptually. On the other hand, in comparative law there exist rich business and court practice and literature which analyse in detail option contracts and options.
The concept of option in the widest sense implies the right of one person to cause the formation of another contract by unilateral declaration. This right is subjective and as a rule transferable and thus it is suitable for being the object of legal transactions which may be concluded after it has occurred or after the acquirer of the option has acquired it. Most frequently it is the right to cause the formation of the sales contract on securities, currencies, interest rates and commodities included in quotation on the regulated market (stock-exchange). This right is called derivative because is has been derived and whose value has also been derived from some other property or some other financial instrument.
Options are most frequently acquired by option contracts. The option contract should contain declaration of the seller by which he transfers to the buyer the right of option (or the option itself) and the declaration of the buyer directed to the acquiring the same. At the same time, by indication of at least the essential components of the contract which will arise by the exercise of the right (of option), the content of the right or authority which the acquirer of the option acquires must be determined or determinable.
As regular economic purposes of the acquisition of options, avoidance of negative effects of the change of the monetary value of the commodity or right in the future (hedging) and gaining profit on the difference between the price set in advance and the price which will exist in the future (speculation) may be mentioned. As regular immediate purposes of acquiring options in the area of finance, insurance from the risk of the change of the exchange rate and expectation of gain because of the expected change of the exchange rate or price of the object of option, which regularly has a current or stock-exchange price may be specified.
The possibility of concluding option contracts is sometimes limited by coercive regulations because only authorised companies may trade in securities included in stock quotation at the stock-exchange, and there is a similar situation in respect of concluding option contracts for foreign currency. Therefore, there arises the problem of the validity of the contract which would be concluded by persons without necessary characteristics, which should be solved by
acting in accordance with the principle favor negotii.
Option contracts in banking and stock-exchange law are regularly bilaterally binding because by them the buyer of the option – in return for acquiring the option – is obliged to pay to the seller of the option a premium on the option. In Croatian law option contracts may be taken as unnamed, consensual, and informal contracts, may be of civil law or commercial character, although in banking or stock-exchange law they will regularly have commercial character. Option contracts have characteristics of a special kind of contract of chance i.e. aleatory legal transaction, which is called “differential” transaction.
The legal nature of option contracts is disputable. It is disputable whether the option contract, in which there is the obligation of the acquirer to pay a premium on the option, is a contract on the purchase and sale of the right to option, or whether the optional contract is a sales contract for the object of the option concluded with the delayed potestative condition which enters into force when the acquirer realizes or exercises the right of option by declaration to the giver to exercise the right of option, or it is a contract sui generis.
By exercising the option, in principle the transferors obligation to transfer the object of the option to the acquirer arises, but when the acquirer has concluded the optional contract for the purpose of speculation, the so-called “cash settlement” is regularly contracted, i.e. monetary payment of the difference between the current and contracted price of the object of the option, and thus this difference is paid instead of the transfer of the object of the option to the acquirer, legal qualification of which is, from the standpoint of Croatian law, an open question.
Keywords
option contracts; options; financial derivatives; futures contract; premium
Hrčak ID:
9787
URI
Publication date:
15.2.2007.
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