Prediction markets can hedge corporate losses – Who decides if they pay out?
Prediction markets are being explored as direct hedging tools for institutional risks that are hard to hedge with standard assets, such as tariffs, payroll data, rate decisions, regulation, or court rulings. Instead of proxy hedges, desks can buy binary contracts that pay out if a specific event occurs, potentially offsetting losses more precisely. Institutional volume on Kalshi has surged, and combined monthly volume on Kalshi and Polymarket has roughly doubled from January to June. The main obstacles are not access but liquidity, legal clarity, and settlement integrity. Thin order books can move prices on large trades, and disputed resolutions can create basis risk: the contract may pay opposite to the real-world economic outcome because of wording or vote-based resolution. Examples include Polymarket disputes around Ukraine minerals and a Bitcoin-sale market. Regulated venues and objective, data-based settlement rules are seen as necessary for broad institutional adoption. Without deeper liquidity and reliable dispute resolution, usage may stay limited to small experimental hedges.
