derivatives

Financial instruments whose value derives from an underlying asset, index, or event — including options, futures, and event contracts. Prediction market contracts are structurally derivatives, so their prices may embed risk premia and market frictions rather than being pure probability estimates.

Cluster: Mechanism Design

Related Concepts

• variance risk premium — The difference between the variance implied by option or event-contract prices and the realized variance of the underlying — the compensation investors demand for bearing volatility risk. In prediction markets, a nonzero variance risk premium means contract prices deviate from true probabilities by a systematic risk component.
• price discovery — The process through which trading activity reveals the fair value or true probability of an event.

Articles about derivatives

• Cryptocurrency Prediction Markets through the Derivatives Lens: Evidence from Kalshi and Polymarket by Seungju Lee; Yebon Lee; Jaewook Lee