General description Economic derivative is known as macro derivatives. They were first issued through a joint venture between Goldman Sachs and Deutsche Bank in 2002. Neither of these banks currently offers economic derivatives— they can be found on the Chicago Mercantile Exchange. Economic derivative is financial instruments which essentially allow investors to place bets on the future performance of the economy as a whole. They are based upon the future value of a specified national economic indicator. These indicators can be retail sales levels, domestic product, or non-farm payrolls.
Profits or Payoffs An investor will purchase a binary option contract in exchange for a guarantee of a payout on a specific date (the exercise date) if the underlying metric (be it GDP, CPI, or inflation) is within the strike range. Economic derivatives most often take the form of a binary option. A binary option contract can have one of two results—if the underlying metric hits within the strike range, the investor gets paid the contracted premium. If the metric falls outside the strike range, the investor is paid nothing.
Pricing (without technical details) Prices are determined through an auction system. Individual buyers are matched with sellers in the auction system. The option prices can be used to construct a risk-neutral probability density function for each data release. Until the introduction of these Economic Derivatives such information was unavailable and probabilistic or density forecasts still remain quite rare.
There are a number of economic metrics which can serve as the underlying information for economic derivatives. These metrics include:
U.S. Non-Farm Payroll
Non-farm payroll is gathered by the U.S. Bureau of Labor Statistics. It represents the payroll data for the majority of the United States with the exception of a few categories of employees.
The employees exclude government employees, nonprofit employees, individuals who work within a private household, and farm employees.
Once these categories are removed, the data represents about 80% of United States employees, and provides monthly information about salary which is used as an indicator of the health of the economy.
The Institute of Supply Management's (ISM) PMI Index
The Institute for Supply Management® (ISM) is the first supply management institute in the world. Since 1915, ISM has executed and extended its mission through education, research, standards of excellence and information dissemination — including the renowned monthly ISM Report On Business® — and maintains a strong global influence among individuals and organizations.
U.S. Initial Jobless Claims
Initial Jobless Claims is a report issued by the U.S. Department of Labor every Thursday at 8:30am EST. The data in the Initial Jobless Claims report reflect how many people filed for unemployment in the previous week. Therefore, this indicator is indicative of growing, rather than sustained unemployment.
Financial analysts estimate what this figure will be and incorporate that estimation into their market projections. If the actual number of claims differs significantly from analysts' estimates, financial markets will face a correction to factor in the revealed data.
Eurozone Harmonized Index of Consumer
Consumer price inflation in the euro area is measured by the Harmonised Index of Consumer Prices (HICP). The HICP is compiled by Eurostat and the national statistical institutes in accordance with harmonised statistical methods.
The ECB aims to maintain annual inflation rates as measured by the HICP below, but close to, 2% over the medium term (see Monetary policy). The HICP is also used in assessing whether a country is ready to join the euro area (see Convergence criteria).
A list of the final costs paid by European consumers for the items in a basket of common goods. The Harmonized Index of Consumer Prices (HICP) is produced by each European Union member…