- money) or nothing at all (out of the money). Other types of contracts currently traded include capped vanilla options and forwards.
Economic derivatives have become attractive for their ability to mitigate some of the market and basis risks found in standard investment vehicles.
For example, a binary option trading on the GDP would pay its face value if, when the official GDP release is made (the exercise date), the GDP value falls within a specific range (strike range). If the GDP figure is outside of this range, the option expires worthless.
By looking at the implied probabilities of different outcomes, economists and investors can compare economic derivatives to Wall Street estimates and look for discrepancies between the two estimations. As might be expected, the market-driven process seen in derivatives pricing has shown itself to be the more consistently accurate predictor of future indicator release values.
Investment dictionary. Academic. 2012.
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