A relatively new form of derivative contract that is based on the future value of some national economic indicator, such as non-farm payrolls, the purchasing manager's index, retail sales levels and the gross domestic product. Most of these economic derivatives are in the form of binary or "digital" options, whereby the only payout options are full payout or nothing at all . 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 GDP value falls within a specific 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.