How Forecast Contracts Work
Forecast Contracts allow investors to make predictions about future economic and climate events by purchasing either a Yes or No contract, essentially answering “yes” or “no” to questions like: “Will US unemployment exceed 4%?” They are weekly, monthly, quarterly, and yearly expiring contracts available. You can view all the available markets on the Markets page.
There are no counterparties: There are no sellers, only buyers. The yes and no are two separate contracts: They do not share the same price, and the investors will never trade the same contract. There is no need for novation as the contracts share execution and go through the same clearinghouse separately.
Pricing
Forecast Contracts are priced between $0.01 and $0.99 per contract and quoted in $0.01 USD increments.
Generally, the more likely an outcome is to occur, the more expensive the contract will be. The less likely it is to occur, the less expensive it will be.
The Basis of Forecast Contracts
Investors who purchase a contract with the correct yes-or-no answer receive a $1.00 settlement payment.
In addition the settlement payment, each customer receives an incentive coupon on the daily closing value of contract on a monthly basis. This means that even if the investor isn’t correct with their prediction, and the contract settles to $0, they still receive coupon income over the life of the contract.
Example
The question is: “Will US Building Permits exceed 1,510,000?” If the investor thinks that the answer is no, they will buy a No contract for 25 cents. An investor buys a Yes contract at 76 cents if they estimate that the answer is yes. ForecastEx charges a $0.01 transaction fee per contract, charged to each side when a transaction is executed. More information about fees is available on the Regulatory page.
The data is released by U.S. Census Bureau, and the number ends up being 1,522,000. The market resolves to Yes. The investor who paid 76 cents for the Yes contract receives $1.00 at settlement. Before transaction fees, the Yes contract buyer's profit is 24 cents: $1.00 settlement payment - $0.76 contract price = $0.24. After the $0.01 transaction fee, the buyer's net profit is 23 cents, before incentive coupons.
The No contract is incorrect and will settle at zero. Before incentive coupons, the No buyer loses 26 cents: the 25-cent contract price plus the $0.01 transaction fee.
Both investors receive monthly incentive coupons for as long as they hold the contract.
Closing a Contract
There is no selling of Forecast Contracts, instead, to close a forecast position the investor will buy the opposite contract in the Forecast Market (i.e. a Yes Contract must be purchased to close a No Contract and vice versa).
Example
The question: “Will the US Unemployment Rate exceed 4%?”
When the investor first purchases the contract, the Yes contract price is 43 cents, and the No contract’s is 57 cents.
Investor buys a Yes contract for 43 cents.
The market changes, turning more optimistic about the unemployment numbers. As a result, the Yes contract price drops to 20 cents, while the No contract price rises to 80 cents.
This shift in the market might lead the investor to re-evaluate their prediction. If they choose to remain inactive and wait for the contract to settle, they risk losing their entire 43-cent investment.
In this case, there is a way to minimize the potential loss: The investor can close out of the contract by buying the opposite contract before the expiration. In this case, they will buy the No contract for 80 cents.
The contract is now closed with this purchase of the opposite contract. Investor receives $1.
Investor cost: 43 cents (initial Yes contract) + 1 cent transaction fee + 80 cents (the new price of No contract) + 1 cent transaction fee = $1.25
$1.00 settlement payment - $1.25 total cost = -$0.25.
The investor has lost 25 cents instead of the initial 44-cent cost of holding the Yes contract through an incorrect settlement, before accounting for incentive coupons.
The investor received incentive coupons until they closed the contract.
Underlying Data Sources
Available Forecast Contracts are based on data releases from government agencies, central banks, and other trusted organizations. Some examples of the organizations: U.S. Bureau of Labor Statistics, United States Census Bureau, Bureau of Economic Analysis, National Oceanic and Atmospheric Administration (NOAA), and University of Michigan.
About ForecastEx
ForecastEx is licensed by the CFTC and is both the exchange and clearinghouse for Forecast Contracts. Clients can purchase the contracts from ForecastEx’s designated Futures Commission Merchants (FCM).
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Questions?
Contact: info@forecastex.com
Markets
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About ForecastEx
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