Tuesday 25 August 2009

Temperature trading on iPredict

About a month ago, I pointed out a nice contract for Kiwis trading on iPredict. TEMP.2009 pays out at $1 if 2009 is warmer than 2008; TEMP.2009.HIGH pays out at $1 if 2009 is the warmest year ever (1998 by the series they're using). HadCRUT has just released July data. My best fit model continues to say that there's zero chance of this year beating 1998 and a very very slim chance (less than 1/140) that this year is colder than 2008. So if the model is right, TEMP.2009 should trade around $0.995 and TEMP.2009.HIGH around $0.001, though both will be pushed a bit towards centre due to time discounting - the contracts will pay out late January when HadCRUT releases the full 2009 series.

TEMP.2009 currently trading at 0.93; TEMP.2009.HIGH at 0.065. Contract pays end-January, or 5 months from now. 7.5% rate of return over 5 months is about a 22% annualized return. Folks on the forums talking about the contracts as sure thing. So the effective time discount rate on iPredict is about 22%. Traders turn down a sure thing yielding a 22% annualized return if they expect to earn higher returns trading on other contracts.

Our deposit limit is too low.

Disclaimer noted in my previous post continues to apply.

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