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Event contracts: resolution rules and probability-priced exposure

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Start with the idea

An event contract pays according to a specified outcome. Understanding the resolution language is as important as predicting what will happen.

Symbols, units & horizon
  • n: nonnegative contract quantity
  • F: fixed winning payout in currency
  • y: realized binary outcome, 1 for win and 0 for loss
  • c: entry cost per contract in currency
  • f: total assumed per-contract fees
  • Π: realized settlement P&L
  • example: no void/refund branch

When and why to use this

Use a resolution-aware contract ledger for event forecasts and prediction-market strategies.

A binary contract may pay a fixed amount for Yes and zero otherwise, but the exact outcome definition, deadline, data source and cancellation rules belong to the actual contract. Related contracts can share one underlying event, so their risks and evaluation observations are not independent.

Distinguish your forecast probability, the last trade and the executable bid or ask for your size. A correct prediction can still be a poor trade if the price and fees are too high. A resting maker order can miss a fill or fill selectively against new information.

A practical workflow reads the full settlement rule, estimates probability from information available before the decision, checks quotes and fees, and tracks the position through resolution or an earlier sale. Never train on a final resolved label before its availability time.

Use the statistics module’s binary-payoff and calibration lessons before building an event bot. Compare probability scores and net cash outcomes separately, cluster tests by event, and include disputed or canceled outcomes where the contract specifies them.

Π=n(Fy−c−f)
Model assumptions, derivation and arithmetic

Event contracts: resolution rules and probability-priced exposure

  1. Use y=1 or y=0 to select the actual settlement payout Fy.
  2. Subtract purchase price and fees per contract.
  3. Multiply by quantity. Before resolution, replacing y with a forecast probability gives expected rather than realized P&L.
Work it by hand

Twenty contracts cost $.60 each with $.01 total costs per contract and pay $1 on Yes. If Yes resolves, P&L=20×(1−.60−.01)=$7.80; if No resolves, it is −$12.20.

Apply it in a strategy

  • Read the precise outcome and settlement source before forming a forecast.
  • Compare forecast probability with executable price, fees and fill assumptions.
  • Log event-linked exposures and reconcile the actual resolution cash flow.

Research deliverable

Write an event ticket with resolution source, evidence cutoff, buy/sell quotes and both outcome cash flows.

Mechanics & research · reviewed 12 September 2026

Abstract and metadata reviewed 12 September 2026. Describes event-driven replay on four Kalshi episodes spanning crypto, weather and sports. Exact sample dates, execution fidelity and results were not independently verified. It motivates lifecycle and fee-aware testing, not a validated strategy.

Further reading: PredictionMarketBench · January 2026 preprint ↗

The linked lesson records the reviewed 2026 GWU study and its historical sample and fee limitations.

Further reading: Prediction-market calibration research checkpoint ↗

Research sources, review dates and limitations

Extend the research question

Build an instrument card with quotation currency, multiplier, calendar, delivery, financing and settlement. State exactly which features prevent an apples-to-apples return comparison.

Continue with the connected research module →

Connect the ideas: Cash flows and accounting

Retrieve: Track units, signed cash movements and ownership at each event.

Check the change: Instrument obligations, financing and external capital flows change the ledger you need.

Math & notation → Markets & returns → Research & backtests → Execution & microstructure → Fund operations & capstone → Putting it all together

Explain it yourself: Why can an account balance rise without an investment profit?

Self-assessed. Write your explanation before opening this comparison.

A deposit raises the balance without being investment P&L. Reconcile external flows separately from fills, fees and marked holdings.

Python implementation

Self-contained teaching example. Python 3.10+; dependencies and input conventions are shown in the code and notation. Run in your own Python environment.

def event_profit(contracts,outcome,price,fee,payout=1):
    if contracts<0 or outcome not in (0,1) or min(price,fee)<0 or payout<=0: raise ValueError("Invalid binary contract")
    return contracts*(payout*outcome-price-fee)

print(event_profit(20,1,.6,.01))

Continue learning

Trading Different Assets: Instruments, Mechanics & Risk — all lessons
  1. Start with the instrument: exposure, ownership and obligations
  2. Stocks and ETFs: shares, dividends, shorting and fund structure
  3. Bonds and bills: lending, accrued interest and settlement cash
  4. Futures: multipliers, ticks, margin and expiry
  5. Commodities: spot goods, storage and the futures curve
  6. Foreign exchange: two currencies, one quote and financing
  7. Options: rights, premiums, exercise and nonlinear exposure
  8. Spot crypto: tokens, venues, wallets and execution
  9. Crypto perpetuals: funding, mark prices and liquidation
  10. Event contracts: resolution rules and probability-priced exposure

Quantitative finance and development glossary · Python resources and libraries · Research sources and limitations