Applying commodity hedging principles to sports betting

You may have seen my blog about Bubba Watson and the Masters at the weekend. In it, I made the comment that I had lost £400 because of the amazing recovery shot that effectively won him the tournament.

One of our readers,  Rajat Mitra, picked me up on that and commented on the blog:

I'm assuming (and if I'm wrong I whole heartedly apologise) the £400 would have been your potential 'winnings', not what you actually lost.  Probably more 'opportunity cost' loss versus actual 'savings' loss. More of a case of reporting cost avoidance than savings that we in procurement need to be so careful about.....!!

Rajat, you are exactly right. It was more of an opportunity cost or potential gain! (And we’ll probably return to the savings measurement issue as well shortly).

But Betfair, which I use for my occasional forays into gambling, enables you to do some interesting things that actually illustrate some of the key principles of commodity hedging, something that many procurement people do get involved with.

Betfair lets you both place bets for something to happen – as you would with a conventional bookmaker. So you bet on a horse, or (like me) you bet on Oosthuizen to win the Masters. But with Betfair, you’re not betting against the company. You’re betting against other individual users of the site, who “offer” the odds to you. So when I put £15 on Oosthuizen, on Saturday afternoon, I took the best odds that some other individual was offering on the website – which was 20 to 1.

I then put a further £10 on at £18 to 1 a few minutes later.  So if Oosthuizen  – and I – had won, my winnings of around £480 would have come from those unfortunate individuals who bet against him.

Now here comes the clever bit. As the tournament progressed, Oosthuizen started doing better. But I was feeling a bit nervous about losing £25 (last of the big spenders that I am). So 24 hours later, I actually put up some of my money to bet against him winning. But his odds were now down to around 8 to 1, so I could risk £10 of my money, and if he won, I would have to pay out £80.  But of course, if he won, I was going to get 20 times my stake back through my previous bet.

So basically, I reduced my winnings (if he won) from £480 to £400. But were he to lose, my potential losses were now reduced from £25 to £15.

Indeed, if I’d put up £25 of my money against him I would have reduced my potential winnings to £280 (£480 - £200), but I would have been in a break-even situation if he lost. Clearly, that’s what I should have done!

Obviously this only works if the market moves in your favour, but it is a good example of how firms use hedging strategies, that - IF they do work out - can mean you’re in a no-lose situation. Of course, if commodity movements go against you, the opposite can happen. But I’m aware of strategies in areas like currencies that aim to minimise risk while maintaining some upside potential if things do go your way.

However, let’s finish with a  health warning. Unless you put a lot of effort into it, don’t think that you can forecast commodity market movements better than the market!

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