Hi,Have you ever heard about an option trading contest based on a basketball game, i.e. you can buy and sell european type options with the payoff depending on the final game result ?How would you price such options ?ThanksDavid

Yes, I believe it's called "betting"

yes ok...but the price is not fixed. It is not the same as if you were betting on a basketball result, and after you split the total amount of money among winner. In our case, the ticket's price is not the same at different time of the game.

How would you price a given ticket (say A wins by more than 10 points to B) ?

can you still buy tickets while the game is going on ?

I guess to start you would need to estimate, using historical data, the probability matrix of team A winning if it was losing by x points with y minutes still to play. If you assume all teams to be equal that would be it, but since teams are inequal, you should be considering additional parameters such as the teams relative rankings, their usual scoring pattern in a game and so on. Once you have built a good model for this distribution, pricing derivatives should be easy.

In our MSc program we had an open outcry futures trading simulation based on a rugby game.Different product same principal.

http://www.tradesports.com/

QuoteOriginally posted by: StochastixI guess to start you would need to estimate, using historical data, the probability matrix of team A winning if it was losing by x points with y minutes still to play. If you assume all teams to be equal that would be it, but since teams are inequal, you should be considering additional parameters such as the teams relative rankings, their usual scoring pattern in a game and so on. Once you have built a good model for this distribution, pricing derivatives should be easy.No, no, no. First what you estimate are physical measure parameters. On top of that your market is as incomplete as it can be, you cannot do any even approximate hadging. You need some preferences based theory for pricing. You will price differently as your holdings change and other complexities need to be taken into account. It is in fact as complex as it can get.

Assuming we have sufficiently complete markets to the introduction of a new security with the payoffs depending on the differential of the basketball game, can we use Black-Scholes and set the strike price equal to the standard spread (or odds) at a particular time? Say, if the spread prior to the game starting is A winning by 10 points over B and a person wants to buy a ticket where A wins by 8 points over B, then the price of the ticket (e.g. option premium) would be $2. If a person wants to buy a ticket where A wins by 12 points, then depending on our other parameters she will have to pay an option premium somewhere between 0 and $1. That way, when new information comes in, we can always update our parameters and get the no arb price for any new ticket purchases. This way, even if the person purchases just before the final horn sounds, the price would be equal to the spread and hence he just pays for what he makes and the value to him is zero.

to use Black Scholes wouldn't you need to be able to trade the underlying? not sure exactly what that would be in this case....

I ve heard of that idea for a couple of years alreadyOne of the problems is that most regulators are unlikley to allow mass-marketing of this product as it is akin to lottery or insurance (especially because there is no liquid regulated market to hedge basketball results)

I guess if you were a spread beeting company you could hedge an optional bet using outright spread bets.One spread bet that interested me was during the last world cup. It was a bet that you could place during a game.It was a spread bet on the "Time of Last Goal".I coundn't see an equivalent of this in finance? Are there similar payouts dependent on the time that an index hit a particular level?Pabo