Sunday, August 31, 2008

Is this sure-fire way of making $50?

What do you think?

On my reading of this Lasseters Sportsbook page here's what you should do.

[Insert legal phrase about no liability, seek independent advice etc]

Bet $1,000 on "DOWN 0.25%", and $150 on "DOWN MORE THAN 0.25%".

Your total outlay will be $1,150.

If rates are cut by 0.25% on Tuesday you will be paid $1,200 as a result of your first bet.

You will make a profit of $50.

If rates are cut by more than 0.25 per cent you will be paid $1,450 as a result of your second bet.

You will make a profit of $300.

Am I missing something?

Is the joke on me?

Is it something to do with two economists walking down a street and seeing a $50 note on the footpath...


Andos said...

So what is the market-inferred probability of a rate cut on Tuesday?
Greater than 99%?

Peter said...

The futures market has a 100% probability of a rate cut.

The sportsbetting market is yet to catch up.

If the futures market its right, it sure looks to me like $50 lying on the footpath.

jamesm said...

Perhaps the efficiency of betting markets is overrated?

Certainly seemed to be during the election - there were arbs everywhere.

EconoMan said...

Peter, taking your premise that the RBA is definitely going to cut, there's actually $66.67 lying on the ground.

If the first bet was $1000 on up 25 basis points, you should bet 133.33 on up more than 25 points. That way you win $1200 either way and profit by $66.67

Of course, you're risking $1133 to win $66.67, so if there is even a 6% chance the RBA gets cold feet, there's no free money (unless you can hedge that risk cheaply on the financial markets)

Andos, Lasseter's implied probability of a rate cut of at least 25 basis points using those prices is 76.5% (and 21.6% for flat)

James, there were not that many profitable arbitrage opportunities during the election. I should know - I took almost every one that gave a return of more than 3% (fn) and that was only in 6 individual electorates. The betting agencies also limited or reduced my bets 3 times.

FN: Consider the non-zero risk of a candidate getting dropped or dying, plus the time value of money.

Anonymous said...

Am I missing some thing - surely there is a >0% chance of no cut. If there is no cut then you will lose $1150.

WT said...

Well that's good enough for me, I'm putting my house on...errr...what now?

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