Investing in the box office: A good bet?

Do you have an uncanny ability to guess how much money a movie will make at the box office? Are you a professional trader? If you answered yes to both questions, you may soon be able to combine those skills by investing through a new box office futures exchange. Regulators at the Commodity Futures Trading Commission (CFTC) this week approved a controversial proposal that would let investors buy "shares" betting on ticket sales for Hollywood films. (Watch a Fox Business report about the new venture.) Here's an instant guide to how the market will work:

What is a box office futures market?

It would be a federally-regulated financial market in which investors would be able to trade futures contracts based on a film's opening-weekend domestic box office receipts.

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Who is running the market?

Two markets have been proposed so far. One, the Trend Exchange, is being run by Media Derivatives Inc, owned by investor Veriana. The other is being run by Cantor Fitzgerald, but has not yet received approval from the CFTC.

How does it work?

The market will allow investors to buy contracts betting a particular film will make a certain amount at the box office on its opening weekend. The contracts are then traded with other investors. So a movie might be trading at $10, meaning that the market expects the film to gross $10 million in its opening weekend. If you predict it will make more, you can buy it. If you think that's too optimistic, you can sell it. After the opening weekend, the contract expires. If you bought the contract at $10 and the film made $20 million, you would earn $10 for every contract you bought. (See Felix Salmon's article on the market in The New York Times for a fuller definition.)

Why set it up?

The idea is to give people with money tied up in a film a way to protect themselves from heavy losses by hedging against its success, and buying futures contracts that will pay off if the movie flops.

Who will use it?

Film financiers, investors and commodity traders. Theoretically, studios will be able to invest in the market, too — though with strict controls to ensure the market cannot be manipulated. If you're an ordinary, individual investor, you won't be able to take part — only licensed traders will be able to buy futures in the box office market.

What do movie studios think of the idea?

They hate it. The Motion Picture Association of America, which is controlled by the major Hollywood studios, is fighting hard against the market's creation. In a statement, the MPAA said the market would be merely a "gambling platform" that could "significantly harm the motion picture industry" by tarnishing its reputation and leaving it open to "financial irregularities and manipulation."

And the government approves?

U.S. regulators have given it the go-ahead, but legislation moving through Congress could see the proposals scrapped before any trading happens. Futures tied to box office receipts are explicitly banned in the derivatives section of the Financial Regulatory Reform Bill currently being finalized in the House of Representatives.

What will be the first movie to be traded?

Takers, a Matt Dillon movie set to be released on August 20. Investors on the Trend Exchange will be able to buy futures contracts on the movie as soon as the market launches. If you're a commodity trader, get your bets in now.

Sources: Yahoo News, AP, MPAA, New York Times, The Trend Exchange