 The Wild Wild World of Wealth |  |
Last January, I borrowed from Henry Hu at the SEC and wrote, “Some derivatives turn banks into ‘empty creditors’ that don’t care whether debtors survive or fail.” Shuttling credit risk back and forth, from one institution to another, is not a good thing. To my way of thinking, it creates an endless supply of toxic securities.
The Financial Times reports that Cantor Fitzgerald and Veriana Networks are introducing movie futures, where it’s possible to bet for or against films.
The companies behind the two exchanges say the markets they plan to launch will allow traders to hedge their investments in films.
In other words, Hollywood can produce garbage and short away the financial downside.
Think about it. Empty creditors don’t care what securities they incubate. What does financial indifference—the petri-dish mentality—mean to Hollywood? Will derivatives leave us with empty producers, who profit from their box-office bombs?
Movie Geek, I like your balanced observations—especially the idea of moving unregulated speculation into an exchange-based marketplace. Fair point.
I also doubt anybody would produce a bomb on purpose. Sounds like The Producers, and we know what happened there. 
But where’s the value-add of these options? Movie producers can lay off their risk by selling LP interests which is a huge part of the movie-making business. So instead of trading the downside through securities, why not limit risk through a defined capital commitment—the old-fashioned way where everybody is committed to the project.
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Ok Norb, thought about it, but still don’t see your point.
When a movie release is announced, the internet acts as “word of mouth” on steroids. There are already dozens of web sites that run box office prediction contests and/or promote analytical models and strategies for calculating box office performance. These two ventures propose to bring this existing, unregulated speculation into a regulated exchange-based marketplace.
If a studio ever attempts to intentionally produce a movie bomb, the public is likely to know well beforehand, and the studio will not be able to offset their risk because the other side to trade with will not be there.
There are many parties that are at financial risk with the production and distribution of a movie. They’ve already estimated what the likely box office return needs to be for them to profit from the movie.
These new markets will provide them an option to offset their existing financial risk, which is what existing futures markets provide.