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CITY INDEX

Q.Dear Josh, last week’s final reading of UK GDP was stronger than first thought. What could this mean for future GDP?

A.Last week, the final reading of UK GDP was revised higher to 0.4 per cent and this means that the UK pulled out of its worst post-war recession with greater strength than first thought, which is a good sign. This had a slightly negative knee-jerk reaction on equities because interest rate hikes could come sooner should this momentum gain pace.

However, the path for future UK GDP for the next two years remains cloudy despite this latest revision. In his recent budget speech, Alistair Darling revised his own growth projections for 2011 lower to 3-3.5 per cent, matching that of the Bank of England. There remain significant headwinds that could impact the UK’s path to recovery and many are now looking to the first quarter of this year as an indicator of how the economy is progressing. The market expects GDP growth this year to be 1-1.25 per cent.

Q.Dear Josh, how does binary betting work?

A.Binary betting is very different to spread betting. First, you are betting on whether an event happens or not. A binary market would be the FTSE 100 to finish up on the day. This asks you whether you think the FTSE 100 will finish higher for that trading day or not. If you agree with the binary, you would buy it. If you disagree, you sell the binary. Binary prices operate on a scale of 0-100. If the binary event happens, all prices expire at 100, while they would expire at 0 if it doesn’t. Say you think the FTSE will finish higher and you buy at a price of 60 at £2 per point. Let us assume that the FTSE does finish higher and the binary price thus expires at 100. The difference between your opening price of 60 and the closing price of 100, multiplied by your stake size, nets you a profit of £80 on the trade. If the FTSE had in fact finished down, prices would expire at 0, resulting in a loss of £120. Binary pricing is based on the probability of the event occurring. This probability is based on three factors: time to expiry, change on the day and volatility. Binary prices can change quickly so be mindful of this when placing your bets. One of the reasons why they are popular is that they are essentially fixed odds betting, which means that from the outset your maximum potential loss is limited.