This contract will be settled according to which Presidential Candidate receives the largest increase in value following the Presidential Debate on Tuesday October 7th. The pre-debate value will be calculated for 2008.PRES.OBAMA and 2008.PRES.McCAIN and then compared with the post-debate value for each of these contracts. This contract will expire at 100 if the value of 2008.PRES.OBAMA increases more than the value of 2008.PRES.McCAIN. This contract will expire at 0 if this is not the case.A similar security for the VP debate paid off zero as there was a slight bump for McCain suggesting Palin did better than expected.
But there is a flaw in the logic for such a security—The market should already take into account the expectation of the debate. In general for any random variable A, the expectation of the expectation of A is the same as the expectation of A, i.e., E(E(A))=E(A).
So, assuming that these securities represent real probabilities, should the value of 2ND.DEBATE.OBAMA before the debate be 50? Not quite. Suppose that there is a 75% chance that the Obama stock goes up 5 and a 25% chance it drops 15. Then the price of 2ND.DEBATE.OBAMA should be 75%. The price of the security indicates who has the least chance of major downside from the debate. But to think one could use this security to predict how well the debate will go makes little sense.
The press release suggests using this security for real-time debate tracking. The price of 2ND.DEBATE.OBAMA should gyrate dramatically on small changes of 2008.PRES.OBAMA. But one could just derive this directly from 2008.PRES.OBAMA and since the later security has much greater liquidity it will likely give better information.
Chris Masse suggested another explanation.
[Intrade] is trying to induce traders into trading more (so as to get more transaction fees), and this new contract offers more upsides for the traders who will bet right. One could double one's initial investment in a matter of 2 days.In which case all the power to them.