Ready to go to the movies? Don’t forget your drink, your popcorn and your derivatives…

Students are probably aware of what currency futures are. To quote our ExPress notes:

“These are contracts, transacted over an exchange, representing a standard amount of currency which can be bought or sold with a specified future settlement (delivery) date, at a rate expressed in another currency. Settlement is guaranteed by the exchange, which acts as counterparty.”

Currency futures, interest rate futures and even relatively obscure items such as soya bean futures are all currently traded.

Last week however an application was made to the US futures regulator to create a contracts market for film futures. If the application is successful this will mean that there will be a “movie derivatives” exchange.

In simple terms this will enable people to “bet” on whether a movie makes money or is a financial failure. Traders will be able to buy and sell contracts speculating on how much money a movie will make at the box office.

As an example of how movie futures could work, a futures contract could be bought by a trader valued at say $1 for every $1m in expected ticket sales during the first month. Therefore, if the market believes a movie would make $100m, traders would be able to buy a futures contract for $100.

If box office estimates were to rise to say $150m because of positive movie critic reviews in the run up to the movie launch, holders of existing contracts would be able to resell them for $150. This would result in a profit of $50.

Of course, if the reviews aren’t very good then the box office estimates would decrease and the value of the contracts would go the other way and there would be a loss!

There are two opposing views to this.

Some people say that this offers a new, novel way for movie producers to manage their financial risk.

Last week however, the Motion Picture Association of America (MPAA) joined forces with producers and cinema owners to oppose the move on the basis that it would encourage speculation, financial irresponsibility and could be harmful to film releases.

To be honest though as an ACCA P4 tutor I find all this so interesting that I personally think they should make a film out of it – surely it would be a box office hit?

The ExP Group