Unforced rugby risks.
Following up from my last post, reading the paper in the tube this morning, I couldn’t help but notice the article headlined “Cashing in on Success: ITV set to earn £10,000 a second as rugby fever grips nation.”
Media experts believe ITV could make £11million on the night, way beyond advertising bosses’ wildest dreams for a tournament where few gave England much chance of progressing past the quarter-finals.
Ok so clearly a good outcome for ITV, so why hedge? Well if they think their shareholders are buying ITV shares because of England’s sporting prowess, well perhaps they shouldn’t. But – unlike a gold producer – I tend to be sceptical that many of ITV’s shareholders are there for a leveraged punt on England. On the other hand it is clearly a very bad outcome for broadcasters in France (and Australia and New Zealand.) Closer to home, it is also apparently a potential financial debacle for the England RFU: if England wins this weekend, it will apparently cost them some £2 million pounds in winners bonuses:
The Rugby Football Union will be left out of pocket if England beats South Africa – because the governing body did not expect the team to do so well.
With England starting the tournament as virtual no-hopers, the RFU reportedly declined to take out insurance to pay the £2million winning bonus to players and staff. Each player is due to receive £45,000 if the team win.
Now I imagine that some of this will be made up in increased merchandising revenues but given the pre-tournament prices on England (significant volumes traded on Betfair at between 30 and 38 to 1), hedging this risk before the start of action would have cost the paltry sum of around £50,000. Of course more sophisticated and dynamic hedging strategies could have been employed that would have potentially even made money for the RFU.
I suspect that the biggest challenge to overcome – as JD often points out in his comments – is one of risk cognition: convincing financial officers that hedging non-core operating risks is in the best interests of their shareholders. If I had time I’d dig around NBER and see if any research has been published corroborating (or refuting) this position. I see it as just the corporate version of the old tried and true traders’ free option: if the market goes my way, I’m smart; if it goes against me, well it’s out of my control. This is by no means new – twenty years ago the first firms selling interest rate, commodity and fx derivatives to corporates faced the same reluctance; what is surprising to me is how little we seemed to have learned. You would think that the ‘follower’ risk classes would have an easier time of it. That is not to say that corporates should rush in enthusiastically without due consideration to every new risk hedge they are shown; prudence is indeed a virtue. But equally doing nothing should never be confused with prudence.
Perhaps we need more farmers in the finance department – these are people who have a visceral and entirely pragmatic understanding of risk and risk management. They of course have to ‘eat their own dogfood’, and blaming “market conditions” – however “unforeseen” they may be, doesn’t pay their expenses…
