Sports Derivatives
By. Jay Patel
Stefan Rossi
Juan De Los Santos
Aleksandr Zakharchenko
Sports Ticket Derivatives
Some Background
● Ticket Service Industry
- Primary - Teams sell directly to fans
- Secondary (resellers) - Ticket holders sell seats to those
who were shut out. Sold for more or less than face value.
- Pre-primary market or the Option Market
- Marketmakers - Teams, players, league officials (etc)
Sports Ticket Derivatives
Ticket Resellers (Scalping)
- Purchased from licensed sellers and sold for a price determined
by individual or company
- Earliest type of derivative - Options on future sporting events
when reseller is a season ticket holder.
- Form of Arbitrage - when amount demanded at the sale
price exceeds the amount supplied.
Sports Ticket Derivatives
Ticket Futures/Contracts
● Stipulate that a ticket for a specific game is delivered to the holder
contingent on a specific team making it to the game.
● Provide a platform for weekly buyins.
● Yoonew - First to offer; estab. 2004
- Purchase ticket months in advance to take
advantage of low market based prices
- Short the seat, insurance requires buying a super bowl ticket,
then can short 16 team fantasy seats.
Sports Ticket Derivatives
Ticket Futures/Contracts (con’t)
● Ticket Score - Offers price reduced team contracts that pay
over 26 week term.
● Option It - Offers the rights to a seat until a week before game time.
Direct and sanctioned involvement with teams.
Sports Revenue
How Big is the Market?
Sports and NFL have grown into a
13 Billion in Revenue in 2016
“Positive Externality” –
a benefit supplied by sports leagues for
which they do not receive (full)
monetary compensation.
Team and Club
Organizations
Valuations
Have grown drastically both
domestically and
Internationally
Sports Revenue Totals
Top 10 sports leagues by revenue
● National Football League (NFL): $13 billion
● Major League Baseball (MLB): $9.5 billion
● Premier League (English/Welsh football league): $5.3 billion
● National Basketball Association (NBA): $4.8 billion
● National Hockey League (NHL): $3.7 billion
● Bundesliga (German football league): $2.8 billion
● La Liga (Spanish football league): $2.2 billion
● Serie A (Italian football league): $1.9 billion
● Ligue 1 (France/Monaco football league): $1.5 billion
● Nippon Professional Baseball (Japanese baseball league): $1.1 billion
Sports Bets
Unlike full game sides and totals, derivatives will usually be
subject to large variations in odds from shop to shop.
Derivatives also allow bettors to circumvent betting limits
where they have hit their maximum on full game
sides and/or totals.
Derivative Bets vs Prop Bets
Revenue
Disparities
Realities
Insurance on Athletes’ contracts
● Sport’s Salary Caps
● Teams with the Highest
Payrolls
● Largest Athletes’ Contracts
● Teams’ Financial Protection
Sport’s Salary Caps
What are the Salary Caps?
● National Football League (NFL) - $167 Million
● Major League Baseball (MLB) - No Salary Cap
● Major League Soccer (MLS) - $3.8 Million
● National Basketball Association (NBA) - $99 Million
● National Hockey League (NHL) - $75 Million
Teams with the Highest Payrolls
Teams with the Highest Payroll
● NFL - Cleveland Brown - $108 Million
● MLB - Los Angeles Dodgers - $242 Million
● NBA - Cleveland Cavaliers - $144 Million (Over the
Cap)
● MLS - Toronto FC - $22.5 Million
● NHL - Chicago Blackhawks - $81 Million (Over the
Cap)
Largest Athletes’ Contracts
● NBA - Stephen Curry - $201 Million/ 5 Years
● MLB - Giancarlo Stanton - $325 Million/ 13 Years
● NFL - Derek Carr - $125 Million/ 5 Years
● MLS - Kaka - about $20 Million/ 3 Years
● NHL - Shea Weber - $110 Million/ 14 Years
Teams’ Financial Protection
How do Teams Protect itself with Athletes’ Contracts?
● Teams are protected by insuring their Athletes in case of injuries, sickness,
death, etc.
● To secure affordable rates for temporary coverage, the NBA and NHL set up
league wide insurance plans.
● The NBA’s policy, run by the BWD Group, costs a modest 4 percent of salaries,
only obligated for the club’s top five players and has limited exclusions for
pre-existing conditions.
● Athletes in sports like Golf and Tennis often buy their own insurance.
FX Risk in Sports
● A lot of the sport activity is international. With international activity comes FX
Risk.
● Can be short-term (a specific event) or long-term (a contract in foreign
currency)
● Plain vanilla FX forwards and FX Options can help hedge or minimize that risk.
Large investments and volatile cashflows
● Any major sports event requires significant monetary contributions for
organization and infrastructure.
● The organizers usually have an expected cash flow, based on the amount of
visitors and advertisement, but they are exposed to risk that the actual
attendance will not meet the expectations
● Perfect use case for derivatives
● Hedged risk can help remove uncertainty from hosting such events as Olympic
games.
Exotic hedge - a possible solution
● The specific costs associated with event vary from one event to another - the
larger the event – the more negotiating power the event organizers have.
● Renting the stadium alone can cost a few hundred thousand dollars for an
event or a few millions for a yearly contract.
● The payback comes in the form of advertising and ticketing revenues, but most
of the revenue streams are variable.
● The derivatives that can hedge the exposure to uncertainty over the number of
visitors are a completely bespoke product
Put option
● Simplest form of hedging – buying an option that if the revenues do not exceed
a certain mark, the option will pay up to that mark
● A financial instrument that is similar to characteristics of a put option.
● As an exotic product – the cost of such option will be high
Collar option
● More advanced option - Make a synthetic “collar”
● If a revenue stream is above a certain point, writer of the option gets the
excessive revenue stream (basically organizers writing a call)
● If a revenue is below another point – writer of the option has to pay to make
the buyer whole (buying a put)
● Collar will allow to reduce the costs associated with using the option
How do you even approach pricing that?
● Analyzing past financial performance of the sports event can give an estimate
of probability of reaching the financial goal. Past revenues brought to today’s
dollars and multiplied by the probability of achieving them can give the starting
of calculating the current possible revenue of event.
● Strike price would be the limits set by the option
● The options will be European style and will have a fixed time to expiration,
however, volatility estimates might prove to be problematic due to a highly
illiquid market (mark-to-model has to be used).
Sports Derivatives
References:
● WOW.com “Sports Ticket Derivative”
● Tom Van Riper “Derivatives Come To The Stadium”, Forbes, December 9th, 2009.
● Mark Peters “Call It Ball Street: Futures Market Created For Sports Tickets”, Hartford
Courant, January 30th, 2008.
● Darren Heitner “Website Guarantees Super Bowl Tickets Before Regular Season Starts”,
Forbes, August 23rd, 2014.
● Michael Arrington “Super Bowl Tickets At A Fraction Of The Price: Super Deal Or Super
Swindle”, Techcrunch.com, January 6th, 2008.
● Matt McGee “U2 at Giants Stadium: A Look at The Live Nation Concert Contract”, @U2Blog,
January 18, 2012
Sports Derivatives
The End
Any Questions ?
