Friday, April 2, 2010

How to win or lose on movies' box office prospects

Two companies are proposing exchanges for betting on movie box office receipts. It's similar to how investors now trade on futures for corn and other commodities.

Trend Exchange from Veriana Ventures would require higher minimum investments than the Cantor Exchange from Cantor Fitzgerald. That means movie fans and other amateurs would more likely be able to participate in Cantor's system, which would be accessible through a Web site.

In Cantor's case, a so-called hedger — such as an investor in the movie or just a fan — would sell futures contracts to a speculator valued at $1 for every $1 million in expected U.S. and Canadian ticket sales during the first month.

So if the market believes the next "Harry Potter" movie would make $175 million, a futures contract would initially go for $175. That opening price would be determined in an auction about six months before a movie's release.

That contract would trade higher and lower as expectations rise and fall. If box office estimates rise to $200 million because of good reviews closer to the movie's opening, holders of existing contracts could resell them for $200, making $25 in profit. Or a hedger could sell a new contract for $200 to a speculator.
If "Harry Potter" ends up making $250 million when the month is up, the speculator would gain $50 for every contract bought at $200. That $50 would be paid by the hedger. However, if the movie makes only $150 million, the hedger would pocket the $50 difference — paid by the speculator.

Multiple those figures by hundreds or thousands of contracts, and Hollywood investors could cover a good part of their risks.

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