We love most everything about the spectacle surrounding the Super Bowl. All the key protagonists try to put their best feet forward – athletes, advertisers, and half-time musicians (well, sometimes). Most Americans don’t have a strong allegiance to one of the two teams fighting it out on the field, but we tune in to see a game-winning touchdown grab or a hilarious commercial spot, often eating enough to feed an offensive lineman in the process.
Last night, the Super Bowl’s formula of athletic and advertising excellence worked again. The NFL’s best defense suffocated its leading offense from the first play of the game, causing safeties, interceptions, and fumbles en route to a comprehensive 43-8 victory (and the first defensive MVP since 2003). Bruno Mars drummed, sang, and danced his way into creating one of the more memorable halftime shows in some time. And while a few advertisers could be accused of a bit of pandering – puppies plus horses in the same commercial comes to mind – there were some fantastic moments, including Morpheus singing opera from the back of a luxury car and Tim Tebow laughing about the freedom no contract brings.
As we sat up last night with the last remaining tortilla chips and guacamole, long after the confetti started to fall, we naturally started to think about what it would take to hedge the Super Bowl’s myriad exposures. Wouldn’t it be great if this game, producing so many elite performances in athletics, marketing, and entertainment (well, sometimes), also brought out the best in hedging all across the nation? Here’s where hedging could help make this American classic even more classic:
Out-of-town fans: What if you had been a 49ers fan two weekends ago, wondering if your team would beat the Seahawks in the NFC Championship and make the Super Bowl? If you didn’t buy a plane ticket ahead of time, you would have run the risk of sharp ticket price appreciation on the SFO transcontinental routes after the win; if you did buy, you might end up with expensive tickets you no longer wanted. One of our favorite new hedging instruments, Options Away, resolves this dilemma for any would-be flyer. On their site, you select the itinerary and price you like, then purchase an option (maturing between 1 and 21 days) to buy the ticket later. It’s simply too painful to watch your team lose and lose hundreds on tickets you don’t even need.
Chicken wings: What if you were hosting a party for hundreds of fans, and you wanted to lock in your substantial exposure to the price of chicken? If you looked at the beef cattle or pork belly markets, you would naturally have assumed liquid futures for popular poultry would also exist – but no! Chickens have a much shorter path from chick to comestible than their livestock friends, plus the vertical integration of the behemoth poultry producers means they lock long-term contracts directly with large consumers and have no need for futures hedging. So this vital price input to your big Super Bowl party could not have been locked in months in advance, despite your best efforts.
NFL player: What if you were an NFL player in a contract year concerned about the huge volatility between potential future earnings after a monster game, or after the most publicized flop imaginable? You might be considering hedging that risk away by selling the rights to a portion of your future earnings (projected based on some forward curve) for an upfront premium (fixed and known). The classic floating-to-fixed trade would lock in some quantum of earnings for you, handing the unpredictability of that part of your future income stream to the buyers. We’re sure the market will be watching Vernon Davis’s 10% IPO via Fantex closely, and regulators will doubtless want to step in if any player sells 100% of his future football earnings, removing any incentive to hit the weight room hard on Monday morning.
Lombardi Trophy: What if you were charged with making the iconic Lombardi Trophy out of sterling silver for the winners to hoist proudly amid falling confetti? If you had signed a contract to produce the trophy well in advance, you could have locked in the input price of silver with an OTC forward or guaranteed a maximum input cost with the use of an option. The market depth and transparency which accompany silver hedging befit the elegance of the trophy itself.
Snow: What if you were a New York metro area municipality charged with clearing snow to ensure a safe path for all fans and players to the Super Bowl’s festivities? You’d want to insure against both the potential costs of a large-scale, rapid snow removal, and the possible lost sales tax revenues from tourists who didn’t want to wade through snowdrifts to buy NY memorabilia. (On that note, if you were Anthony Kiedis and Flea, you’d want to hedge against the financial costs of contracting pneumonia from performing shirtless.) Unfortunately for you, the snow derivatives market has all but disappeared over the past few years – the CME records more than 500 snow-related contracts in 2011 versus 0 for 2013! There are far more municipalities that will be hurt by too much snow than there are ski resorts wanting to hedge against too little, which makes it tough to generate a true two-sided market. But if winter keeps being this brutal, perhaps we’ll see more hedging next year.
It may not be as glamorous as a kickoff return for a touchdown to start the second half, or a virtuosic drumming/singing/dancing halftime show, but the right hedge can smooth out volatile outcomes and secure asset price and quantity well in advance. If you’d like to express your jubilation or dismay at yesterday’s game, or talk about any hedging-related issues, don’t hesitate to give us a call. We’ve been at this almost as long as the Red Hot Chili Peppers.
Give us a call at 610.925.3120 or email us