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Published: Friday, 3/12/2010

Wall Street goes to Hollywood


NEW YORK - Welcome to Hollywood's newest version of risky business: movie derivatives.

Two trading firms, one of them an established Wall Street player and the other a Midwest upstart, are each about to premiere a sophisticated financial tool: a box-office futures exchange that would allow Hollywood studios and others to hedge against the box-office performance of movies, just as farmers swap corn or wheat futures to protect themselves from crop failures.

The Cantor Exchange, formed by New York firm Cantor Fitzgerald and set to launch in April, last week demonstrated its system to 90 Hollywood executives in a packed Century City, Calif., hotel conference room. Amid a spirited trading-floor atmosphere, the participants shouted out guesses and made bets on how much Alice in Wonderland might rake in at the box office.

An Indiana company, Veriana Networks, which says its management includes "veterans of the Chicago exchange community," unveiled yesterday the Trend Exchange, its own rival futures exchange for box-office receipts.

Both firms say they expect to win regulatory approval within the next couple of months from the Commodity Futures Trading Commission, which oversees futures markets.

With handicapping the weekend box office now a topic around the family breakfast table, Cantor and Veriana hope they can harness the national obsession to create a safety net for the risky and expensive business of producing movies.

If Universal Pictures, for instance, had traded a futures contract for The Wolfman, it might have mitigated its losses on the recent flop.

"There is a tremendous amount of risk in every movie and a need to manage that risk," said Don Chance, a finance professor at Louisiana State University who has studied financial exchanges for the entertainment industry. "I would think a futures market would have great potential to do that."

Reducing the financial risk of filmmaking through futures contracts, a type of derivative, could bring more investment to Hollywood. The surge of private equity money into the movie business a few years back has dried up because returns were uneven and often lower than promised.

"This product could help to even out the volatility of the movie business," said Clark Hallren, a former JPMorgan Chase & Co. entertainment banker who is consulting for Veriana.

The exchanges also could allow a lucky speculator to profit enormously by betting the long odds on a dark horse.

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