Movie financiers and media funds can now turn to the options market to hedge against the next box office flop or punt on the next Lord of the Rings. A newly formed boutique has created an auction site for over-the-counter derivatives referenced to blockbuster movies, according to Alfred Mukunya, co-founder of Center Group in West Chester, Pa. "This is bizarre and has got to be a niche market," said Jonathan Davies, director of Reoch Consulting in London. "But there is a risk, so why not use a derivative to hedge it?"
Mukunya said it is impossible to predict the size of the market, but pointed toward the billions of dollars of box office recepits Hollywood makes every year and the potential interest from media investors to demonstrate that this could be a significant market.
The platform, dubbed BoxOfficeTRADE, allows end-users to purchase puts and calls on individual titles, said Mukunya. The site will start with options around the opening weeks because that is where the risk is concentrated, but will extend the maturities if there is demand. The options are traded on an auction basis, in which the premium from the options that expire out the money pay the holders of the in the money options.
All option contracts will be documented under International Swaps and Derivatives Association contracts and a major bank will act as the escrow agent. The options will be based on the Nielsen EDI rankings.
Mukunya is a former partner at independent derivatives advisor Chatham Financial. He has launched the firm with Ajit Kumar, a financial engineer from the Indian Institute of Technology, and Paul Jay Shrater, a media entrepreneur.