Futures - Coming to Movies Near You

And no, the title of this post refers not to an upcoming cinematic release, but rather, to the financial concept I recently became acquainted with last semester in my Foundations of Finance class.

WAIT!  Don't glaze over yet - this is interesting.  Some people think it could bring in extra revenue as the movie industry works to overcome losses from continued declines in the DVD/home movie sector.

Reuters reported today that two companies, Media Derivatives and Cantor Fitzgerald, are taking the lead in establishing platforms for investors to trade film futures.

What are futures?  I'm partial to examples, and find the use of futures in the airline industry a clear one to follow:

Airlines know, in any given year, that they are going to need fuel - and a good deal of it.  An airline might see that gas prices are down and opt to enter into a futures contract with a fuel vendor.  Basically, this means that the airline pays today for an asset (in this case jet fuel) that will be delivered in the future.  The airline is hedging a bet that fuel costs on the delivery date will be higher than they were on the day of purchase.  If that proves true, the airline saved money by trading jet fuel futures.

This is likely an over-simplified explanation, but you get the idea.

Apparently, film futures will work in a similar way:  "...if the expected box office revenue of a film is $170 million, an investor could buy a futures contract for $170 and, if the movie does better than expected, could sell at a higher price," said Cantor in the Reuters' piece.

In other words, investors in film futures would benefit from the difference between a lower price paid today and a higher price asked in the future, just as the airline in the example above.

The benefit for the studio behind the film is the potential to limit any downside.  Per Reuters, "Hollywood studios often bring in partners to invest in their movies and minimize their risk.  A futures market could give producers another measure of protection."

It is unclear at which stage of a film's production futures will be offered.  However, it seems possible that if they're made available during development, futures could help with the financing.  As I discussed in an earlier post, in the last several years, producers have been struggling to fill a gap left by "falling foreign dollars" (read about that HERE).

Media Derivative's Trend Exchange plans to start trading by the summer and Cantor Fitzgerald as early as the end of April.

For the full Reuters' story, click HERE.

...Ain't it grand when you find you can apply recently acquired knowledge to real world applications?!

Then again, maybe this J-School Grad just doesn't get out enough these days...