RT Journal Article
SR Electronic
T1 Numeraire Dependence in Risk-Neutral Probabilities of Event Outcomes
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 128
OP 143
DO 10.3905/jod.2019.26.4.128
VO 26
IS 4
A1 Michael Hanke
A1 Rolf Poulsen
A1 Alex Weissensteiner
YR 2019
UL https://pm-research.com/content/26/4/128.abstract
AB For most non-financial events, risk-neutral outcome probabilities are identical across numeraire currencies. Some events, however, such as elections or referendums, may have an impact on exchange rates. This implies numeraire dependence in risk-neutral outcome probabilities, which leads to different state prices for affected currency pairs. If betting odds available to punters do not reflect these differences, this may give rise to (approximate) arbitrage opportunities. Despite the sizable risk this creates, odds quoted by bookmakers seem to ignore this effect.TOPICS: Currency, performance measurement, risk management