Hedging World Cup Risk

Today I was walking around Barcelona and saw this interesting time-deposit offer from Banesto (a local bank). They promise you 3%/year, but IF Spain wins the World Cup, the investor gets 4%.

Around the World Cup we see all kinds of offers like this (in Spain, the UK, and Brazil at least): buy a flat-screen TV and if Brazil wins you get another one, etc.

An interesting question is how much money does the bank expects to spend with this offer? How should  this be hedged?  Of course, based on historical probabilities they won't lose a dime, but with Spain being one the favourites, what to do to at least find an estimate? 

Supose that the bank's reinvestment rate is 4%. If Spain does not win the World Cup, they make a 1% profit. If Spain does win, they make zero. The expected return is the 1%*(Prob Win), which looks good on their side given previous history.

I wonder if they could hedge this against a portfolio of online bets held by betting houses. 

Any ideas? This might turn into a nice exam question or topic for the derivatives course.

Things I Love about Work

There are many things I love about being an academic. One of the best is the chance to meet interesting people and take part in interesting discussions.

Today IESE hosted a workshop on Football Economics. The event was organized by Barcelona FC and IESE. and opened by Joan Laporta (Barca's president), who even stayed for the whole presentation of the first paper. Johan Cruyff was also in the audience (he's the current manager of Cataluña's national team) and many senior directors of Barcelona.

Papers talked about the market for broadcasting rights, differences between European and US sporting leagues and the labor market for football players.

Overall, a good day.