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State-Price Security

Trading Term

A state-price security pays a fixed amount, conventionally $1.00, if a specified future state of the world occurs and nothing otherwise. Also known as an Arrow-Debreu security after the economists who formalized the concept, it is the theoretical building block from which more complex contingent claims can be assembled. Because the payout is fixed and known in advance, the price of the security carries information about the probability the market assigns to that state, which is what makes binary event contracts useful as forecasting instruments as well as trading instruments.

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