Numeraire Dependence in Risk-Neutral Probabilities of Event Outcomes
The Journal of Derivatives, 26(4), 128-143
Posted: 8 Feb 2018 Last revised: 9 Jun 2020
Date Written: March 6, 2018
For most 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.
Keywords: betting odds; political events; exchange rate risk
JEL Classification: G13, G15, F31
Suggested Citation: Suggested Citation