20th November 2023
OPTION CONTRACT: A LEGAL PATH TO SECURE PROFITABLE CHOICES
Corporate
Council Meetings
WHY DEVELOP A NEW LAW?
In the context of increasing financial literacy and economic development, the role of derivative financial instruments is growing to establish a more predictable environment.
Imagine planning your economic activities in an unstable financial situation. It seems unreal, doesn't it? Fortunately, in the financial world, there are tools that allow you to create predictability and, to some extent, "insure" against potential risks.
Suppose you're exporting a product and expect payment in US dollars six months later. You need to convert it to AMD after receiving it to pay salaries or cover other expenses. However, the uncertainty of exchange rate changes from November to August looms large. How do you safeguard yourself in this situation?
Enter the option contract. The Latin word "optionem" means choice or free choice, reflecting the freedom to choose. An option contract addresses the above problem.
WHAT DOES THE NEW LAW OFFER?
An option contract provides the right, without the obligation, to buy or sell something. If you're considering buying an apartment in August for 10,000,000 AMD but are unsure about its future value, signing an option contract grants you the right to:
· Buy the apartment for 10,000,000 drams in August, regardless of market fluctuations that could raise its value to 13,000,000 drams.
· Opt out of the purchase if apartment prices drop in August, with the opportunity to buy a similar property for 8,000,000 AMD.
· All this is facilitated through the payment of a pre-agreed premium.
Recognizing this issue, the SME Council, led by the Deputy Prime Minister and professionally supported by EBRD’s Investment Council of Armenia, identified the problem. In 2023, after discussions with the business community, expert circles, and state bodies, the Investment Council of Armenia drafted legislative amendments. The proposal seeks to add to existing laws (Civil Code of the Republic of Armenia, "On Joint Stock Companies," "On State Registration of Rights to Property") the concept of an option contract and its main conditions, aligning with global and Armenian business practices.
WHAT RESULT TO EXPECT?
The new law aims to create a predictable business environment by providing "insurance" against fluctuations, fostering opportunities for investment, enabling risk management, and advancing financial market development.
It introduces a more competitive investment environment for Armenia, benefitting both individuals and businesses by offering a new financial toolkit.
For additional details on the proposed amendments, you can refer to this link.