What is the definition of option contract?
Answer
- An option contract is a contract between a buyer and a seller, which allows the the seller to enter into a contract for sale of goods, but the sale is considered a contingent upon certain terms whether after a certain timeframe or after a certain action. It is commonly done when the buyer needs the goods but feels they do not have sufficient cash to pay for the goods at that particular time, and hence to be allowed to seek for financing, enters into an options contract at the will of the seller.
Explanation:
Options contract helps a buyer of goods to seek for financing before a certain time passes. If the buyer fails to pay or secure financing by the set period of time, the seller or dealer keeps the deposit. For example, if a new car is launched in the market and you feel that you need to secure it as soon as possible, if the seller agrees to enter into an options contract, you are required to pay a certain amount of deposit and then set a date after which you will have found financing to pay the remaining amount.
