Can Ali Baba insure against Svala winning Eurovision tonight?

As I was scrolling through Facebook earlier I came across a post by one of my favourite Facebook friends, the kebab place in Reykjavik called Ali Baba. The first reason why Ali Baba has become such a good friend on Facebook is of course that they make the tastiest kebab place in the country. It is in fact so good that a good friend of mine once had more than 30 kebabs there in a single month (a 30 day month).

The second reason why I like them is because I can relate to them through the difficult experience of having to learn a new language at an adult age. The owners of the place moved to Iceland from Syria (I believe) and now have to go through the pain of learning Icelandic and like them, I recently moved to Germany and have to suffer the pain of learning German.

Unlike me however, the great businessman of Ali Baba are brave. They are active on Facebook and post everything in Icelandic. And sure, sometime I  giggle at some errors in grammar, but I always get what they are saying and after being tortured to learn German I am simply impressed by their ability and progress.

The Eurovision 2017 post

In this post that these excellent kebab makers in Reykjvik posted on their page they made a grand offer to the  Icelandic public. The post stated that “anyone who purchases Ali Baba this week will get a full refund on the goods purchased as well as a free car and a free apartment as well”.

svala 1

Ali Baba original post and promise

Now, being pessimistic of Iceland’s chances in the European song contest is a core Icelandic characteristic. It is probably the second most common trade of Icelanders. The first one obviously being our pretend appreciation for bad food (shark, whale, sheep-face, etc.).

The fact that these recent Icelanders have now adopted this characteristic goes to show how impressive their integration into Icelandic society has been. Again, as with my language braveness, even while wearing socks under my Birkenstock sandals and barbecuing sausages, my toes doe not reach through the open front anywhere near these guys heals.

Getting to the point. I was not planning on talking about integration when I started this post, but rather what I wanted to do was to assess the risk of Ali Baba’s offer. In particular, I wanted to try and figure out how much they would have to pay to insure this offer (if they were actually to go through with it). In other words, how much would Ali Baba have to pay in order to ensure that if Iceland were to win that they would not make any losses?

Who would insure Ali Baba’s offer?

I somehow doubt that if Ali Baba were to approach Allianz and ask for a quote they would get one. But, even if traditional insurers would not insure them there is a way in which Ali Baba could hedge their potential losses (at least to an extent). What they could do is that they could buy bets from online bookmakers. But how much would they have to put down?

At the moment there are a number of different bookmakers taking bets on Eurovision. They all agree that Svala has very small chance of winning. But they disagree of how unlikely she is to win.

For example, Stan James thinks that there is a less then a 0.17% chance of Svala taking the contest to Iceland in 2018. What that means is that Stan James is ready to pay a punter willing to part with a pound a full £600 plus her pound back if Svala wins.

William Hill on the other hand is much more optimistic on Svala’s chances and thinks that she has a 1% chance of winning.  As a result, William Hill is only willing to give their punters £100 plus the pound in case of a Svala victory (see chart below for a full range of probabilities by bookmakers).

svala 2

The Bookmakers do not agree on the magnitude of Svala’s chances tonight.

How much would Ali Baba have to pay?

Since Ali Baba was not particularly specific in their description of what type of house or car they would offer we will have to make a few assumptions about the cost to Ali Baba in case of a Svala victory. So, let’s assume that on average their customers would get;

In total this would mean that a full refund plus the expenses for the house and the car, Ali Baba faces a potential cost of up to £299,297 (41.001.250,00 kr.) per customer. Now, in case of a Svala victory, order for Ali Baba to reclaim that cost from the bookmaker with the best odds (Stan James), they would have to bet £499 on a Svala victory. And that might be plausible to do.

However, if Ali Baba had more than one client, the cost of insuring them in this way would quickly start to rise. And if demand for kabab on that day was sufficient it is not unlikely that Ali Baba’s big orders on Stan James would start moving the bookmaker market. What that means is higher premiums. So what does that mean for Ali Baba’s cost of insurance?

For simplicity, let us assume that the true probability of a Svala victory lies somewhere within the current range implied by bookmaker odds. Also assume that bookmakers would offer bets always at least at the level of the current worst offer (£66). Now, depending on when Ali Baba would start moving the market, if Ali Baba sold 50 kebabs on that day and wanted to make sure they did not loose any money, they could end up paying up to £226k for insurance alone!

As with most of my stories, I start off with an ok idea, I write for too long, go off tangent, and when it comes to ending the post I have no clue how to. So, why not just end it with a chart showing the potential cost of insuring this offer by Ali Baba (yellow bars show the lowest possible cost and the grey bars the highest).

Svala 3

At minimum Ali Baba would have to pay £14k to bookmakers to avoid any losses, but they could end up having to pay more than £200k.

Thanks for reading,
Eiki

PS. I really hunger for a kebab now.

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s