"And the Oscar goes to..." Ah, the glitz and glamor of Hollywood! But don't be fooled. Hollywood is a big business. And, like every big business, has financing needs that are more and more being met by outside investors. These investors are typically risk-averse, and require that the employees (the cast and crew) meet the obligations of the project . As such, insurance is an integral component to any project. Speculating on your favorite new flicks and profiting in the process is becoming a component of the Hollywood business. (Do the characters in these classic films reflect what it's like to work on Wall Street? Find out in Financial Careers According To Hollywood.)
IN PICTURES: World's Greatest Investors

Investing in Hollywood: The Past
Investing in Hollywood has been elusive for many investors. While individual investors have been virtually shut out, institutional clients, large banking institutions and private equity/ consortium have been able participate in the entertainment industry via several avenues. The large investment groups speculate on everything from the success of the script to the success of the entire production. Additionally, investor groups both private and in some large banks were able to finance movie and theater productions, and receive an agreed upon payout. Institutional investors have also taken part through the purchase of Bowie Bonds. Bowie Bonds, created in 1987, were asset backed securities where the underlying assets were the current and future revenues generated from David Bowie's first 25 albums. Since the creation of the Bowie bonds, similar asset-backed bonds have been created and sold using the royalties from James Brown and the Isley Brothers. As such, the institutional investor has been able to speculate on the longevity of these artists' music and benefit from the future revenue that are generated every time the music is played. (The glitz and glam of Hollywood could help put some more glitz in your pocket. Find out how in Analyzing Show Biz Stocks.)

Unlike the large investors, individuals have been limited to indirect investments, primarily through the purchase of distribution or insurance company stocks. Insuring the movie industry (especially in today's media hungry paparazzi world) seems like an insurmountable task. But before any movie project gets made, investors require that insurance be taken out on everything from start to completion of the project. There are only a small number of players that participate in this niche, two of which are Chubb Group (NYSE:CB) and Fireman's Fund, a division of insurance giant Allianz Group (NYSE:AZSEY). These companies have made a living off of insuring Hollywood films.

The Future in Hollywood Futures
While in the past, investing in a Hollywood production had been limited to the large banking firms or institutional investors, the future looks more active for individual investors. Individual investors may be able to participate by speculating on the success or failure of films.

Cantor Fitzgerald, a large trading and brokerage house purchased Hollywood Stock Exchange (HSX), a play-money platform, in 2001. This platform allows the virtual trading of the expected profits from movie openings by purchasing or selling futures contracts. Cantor Fitzgerald recently announced it expects approval from the Commodity Futures Trading Commission to trade real futures contracts on this platform by April 20th, 2010, thus turning the platform into a real-money exchange. The company has labeled these contracts domestic box office receipts (DBOR), which are futures contracts offered about six months prior to a project's release date.

Cantor Futures Exchange: How it Works
Investors can buy or sell DBORs based on their opinion of the potential profits from a movie. The platform will allow various trading strategies, from short selling to arbitrage and or momentum trading. Contracts will be cashed out and removed from the exchange four weeks after a movie's wide release, or 12 weeks after a limited release. The contracts are priced according to the expected financial success of a movie - a movie expected to generate $100 million will cost $50, while forecasted revenues of $250 million will result in a contract worth $250.

At the end of the contract, the extent to which the movie has over or underperformed expectation will determine the terminal value. Unlike other futures markets where there is a lot of public information, the information on a movie (cast, theme, script, director) is all based on entertainment news reports and the investor's judgment of how these will come together to create a successful box office opening.

This may make the trading more risky, as this market may not be efficient and information may not be evenly distributed. Despite the potential risks involved, this platform allows any investor, from institutional to the small trader, to speculate on this market.

Investing directly via a futures contract or indirectly via the insurance companies allows the individual investor to participate in Hollywood's success. Speculating on the success of a film and garnering profit in return allows the "little man" to put a little of that Hollywood glitz and glamor into his pocket.

Still feeling uninformed? Check out last week's Water Cooler Finance to see what's been happening in financial news.

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