What Is an Event Contract?
An event contract is the simplest instrument in finance. It references a yes-or-no question about the world, resolves once the answer is known, and settles at exactly one of two values: $1 if the event happened, $0 if it did not. Will it rain in Chicago tomorrow. Will the central bank cut rates at its next meeting. Will this team win the final. Everything you can trade on a prediction market is a claim of this shape.
Price is probability
Because the contract pays $1 or nothing, its fair value is the probability of the event. A contract trading at 62 cents is a market saying the event has roughly a chance of happening. No conversion, no model, no curve: the price is the implied probability, which is why prediction markets are read as forecasts.
That identity cuts both ways. If your own estimate of the probability differs from the price, the difference is your expected edge per contract. Believe the true chance is while the market offers the contract at 62 cents, and buying earns an expected , eight cents per contract, before fees.
A contract pays $1 if the event occurs. You judge the probability to be .
Offered at 62 cents, the expected profit of buying one contract is . Offered at 75 cents, buying has negative expectation: the market is paying more than your model says the claim is worth.
Yes and No are the same contract
Every market has two sides. A Yes contract pays $1 if the event happens; a No contract pays $1 if it does not. The two prices must sum to $1, because exactly one of them will pay: if Yes trades at 62 cents, No is worth 38 cents. Selling Yes and buying No are the same position expressed two ways, which matters operationally on venues where you cannot short and instead buy the opposite side.
The payoff is bounded
Unlike a share or a future, an event contract cannot run away from you in either direction. Buy at 62 cents and the most you can lose is 62 cents; the most you can make is 38. That bounded geometry changes everything downstream: spreads and risk live in probability points, position variance is largest near 50 cents and vanishes at the extremes, and there is no such thing as a stop-loss at settlement, because the contract jumps to 0 or 1 rather than drifting there.
Where they trade
In the US, event contracts are regulated as derivatives by the CFTC and trade on designated contract markets, with positions cleared and, on most venues, fully collateralised: the exchange holds your maximum possible loss in cash. Regulated exchanges such as Kalshi and ForecastEx list politics, economics, weather and sports; crypto-native venues such as Polymarket run the same product on different settlement rails. The venue details change frequently; the contract itself, a cleared binary claim on a public question, does not.
An event contract settles at $1 or $0, so its price is the market's probability. Reading prices as probabilities, and disagreements with the price as expected edge, is the foundation every later lesson builds on.
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