Contingent claims priced by arbitrage arguments are the financial instruments that are distinguished from underlying securities. In financial markets, a contingent claim is a derivative whose future payoff depends on the value of another “underlying” asset. These assets can be a stock, a bond, a commodity, or any other asset. The pricing of these contingent claims is often done using arbitrage arguments. Arbitrage is the practice of taking advantage of a price difference between two or more markets, and in the context of contingent claims, it involves creating a risk-free position by taking offsetting positions in the underlying asset and the derivative. The price of the contingent claim is then determined such that there is no opportunity for arbitrage. This is why these contingent claims are distinguished from underlying securities, which have their prices assumed rather than determined through arbitrage arguments.

Choice A is incorrect. Proprietary rights priced by arbitrage arguments do not form a separate category of financial instruments that are distinguished from underlying securities. Proprietary rights refer to the exclusive rights of ownership, which is not relevant in this context.

Choice C is incorrect. Contingent rights priced by arbitrage arguments also do not form a distinct category of financial instruments from underlying securities. While contingent claims are indeed a type of financial instrument, the term "contingent rights" does not have a standard definition in finance and thus does not fit the description provided.

Choice D is incorrect. Proprietary claims priced by arbitrage arguments do not exist as a separate category in financial markets that can be distinguished from underlying securities. The term "proprietary claims" does not have an established meaning within finance and therefore cannot be considered correct.

Things to Remember

• Contingent claims are financial instruments whose future payoff depends on the value of another underlying asset.
• Arbitrage is the practice of taking advantage of price differences between markets to create a risk-free position.