What is a Deferred Payment Option
A deferred payment option is an option that operationally defers payment on the investment until a later date. In the options market, deferred payment options are a type of exotic option due to the more complex structuring and greater illiquidity than their plain vanilla counterparts. Across the investment industry several investment vehicles are structured with deferred payment options, most of which are focused on retirement investing.
BREAKING DOWN Deferred Payment Option
Deferred payment options defer payment until a later date requiring the investor receiving payments to plan for greater illiquidity than standard investments. Deferred payment options in the options market are generally considered to be a type of exotic option due to their complex structuring and alternative market trading. Broadly, across the investment industry many investors will choose to invest in deferred payment vehicles since they have certain long-term advantages. In some cases, lenders may also provide a deferred payment option to borrowers under special circumstances such as hardship or academic studies.
Deferred Payment Exotic Options
Deferred payment options are a type of exotic option typically traded on an alternative exchange. Exotic options encompass a broad range of options with more complex structuring than plain vanilla options. As such, the contract agreements and trading terms are negotiated on a per contract basis. This differs from the offering of plain vanilla options which are listed on public market option exchanges and supported by standardized regulations and market regulators.
A deferred payment option will usually be structured as an American option that defers the option’s payout until the expiration date. A deferred payment option holder can exercise their option at any time during the life of the option, up until the expiration date. The payout from the option is recorded as the amount owed at the time of expiration.
Investors in deferred payment options must consider how the deferred payment will affect their investing plans. If a payout involves receiving an underlying security, the investor will not receive that security until the date of the contract’s expiration. If the payout involves selling a security the investor will not be required to provide the security until the expiration date and they will also not receive the payment until expiration.
Deferred Payment Investments
In the investment industry investors can choose from a wide range of investments that offer deferred payment. Deferred payment annuities are one of the most common, allowing investors to make contributions and receive regular payouts over a period of time. Individual retirement accounts (IRAs) are also considered deferred payment investments since they offer planned payouts after a specified date.
Deferred Payment Billing
Deferred payment may also be an option for various types of billing cycles. Academic loans are one credit product that offer deferred payments to students with payments beginning after they graduate. Generally deferred payment options may be a caveat that many service providers offer to their clients giving them extra time to save and meet their obligations.