Now you can Trade and Speculate in Hollywood Box Office Returns

Apr 21, 2010 by Tom Jones

Do you want to sell 2 Sherlock Holmes, but purchase 1,000 Avatar’s, or bet the ranch on how much all of the box office receipts will be from movies coming out in a certain month?

Well, in a way you can, but a tad differently:

Regulators approve movie box office Futures Market

“U.S. regulators have approved the creation of a market for movie industry participants and speculators to trade on predicted box office receipts, despite its denouncement by Hollywood studios as ‘legalized gambling.’”

Backers of the box-office exchanges say those markets would help Hollywood manage risk in a notoriously hit-or-miss business.

Investors would be able to hedge against potential flops by preselling a share of future box office receipts. The exchanges could even guard against likely hits such as the upcoming “Harry Potter” and “Twilight” sequels falling short of projections. If a movie doesn’t do as well as expected, investors would at least be guaranteed revenue from those presales, known as futures contracts.  Source:Taragana News

Futures contracts, are also knows as a Derivative, which is actually older than the trading of stocks and other financial instruments.

The Cotton Exchange was established in New Orleans, Louisiana, in 1871 on the corner of Carondelet and Gravier Streets. The Cotton Exchange was conceived and financed by a group of cotton merchants with support from bankers at a time when fully one-third of the entire production of cotton the United States, was sent to New Orleans. The Exchange wanted to bring order to what was a highly speculative and often erratic pricing system by providing a centralized trading office where people involved in the business could obtain information about market conditions and prices. As well as trading, the Exchange established standards for classification and facilitated payments between buyers and sellers. Source: New Orleans Cotton Exchange

It came to be that they were created so that farmers and other growers could "lock in" certain prices for their crops and grows, before delivery.

Being able to effectively "Hedge" their crops, farmers became less reliant on the whims of weather and other risks before their crop was delivered.

So thus futures trading was established as a means to minimize risk. The producers sold a futures contract at a certain price, and somebody bought that contract, a speculator, betting that the price and volume of that particular contract wouldn’t be met.

So in essence, what is happening is that if the grower was expecting $5 a bushel of corn, and before he was able to deliver the harvest to the buyer, the price had declined to $4, the grower lost some money on his bushels, but he also sold 1,000 futures contracts, to lessen his risk, and made money in advance from the "premiums" charged to the buyer of the contracts.

Therefore, the seller, in order to lock in his price, received a "premium" for selling his contracts, thereby receiving in advance a fee for every contract sold. So if he makes 2 dollars a bushel for selling the contract and loses one dollar per bushel on his crop, there’s a net gain of a dollar a bushel, less the expenses of the trading and other associated costs, equalizing the seller’s original profit.

Looking at it in the reverse, if the crop was delivered on time and on price, the speculator is out of luck, and the grower is only out the price it cost to sell the contracts.

However, if the speculator is correct in his bet, for example, and the delivery prices at the end of the contract had sunk to $2 a bushel, and they bought the contracts at $5 a bushel, then the speculator just made $3000 less costs. (1,000 contracts bought for delivery at $5 from the Grower, but the price upon expiration of the contract was $2).

Nowadays, the Futures markets are used to hedge just about every single financial instrument including the Dow Jones, the S & P, and too many contracts to even bother to list.

What to Expect Soon

Trading won’t start immediately, as the commission is still reviewing the kinds of contracts — essentially pre-sales of a share of future box office receipts — that could be traded there.

Movie trailer reviews vs Box office receipts

It’s also reviewing a proposal to create a second market called the Cantor Exchange. That one would have lower investment requirements than the Trend Exchange–making it more likely for movie fans and other amateurs to participate.

"With handicapping the weekend box office now a topic around the family breakfast table, Cantor and Veriana (the other upstart Box Office Exchange) hope they can harness the national obsession to create a safety net for the risky and expensive business of producing movies.

"If Universal Pictures, for instance, had traded a futures contract for ‘The Wolfman,’ it might have mitigated its losses on the recent flop," said Don Chance, a finance professor at Louisiana State University who has studied financial exchanges for the entertainment industry. "I would think a futures market would have great potential to do that."

Making films is notoriously risky, and people and companies make and lose fortunes every day when doing so. Reducing the financial risk of filmmaking through futures contracts, would even out these peaks and troughs, and probably bring new investment monies into a beleaguered economy, and more movie related jobs into Los Angeles.

Calling all aspiring Spielberg’s!

Now who would have thought of such a thing?

Sometimes the old and the new merge into making things better, and that’s Travelin’ Local’s script and story.

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