Posted by Jim Geary on Wednesday, 13 May 1998:
Arbitrage Forces
Assumptions:
1) The below quoted prices are valid and coexist at a certain
point in time.
2) I didn't botch the mental math
3) I have the correct understanding of how future's prices work.
I pulled these prices off http://www.nss.net/Futures/BoxFut.html.
WBA HEAVYWEIGHT TITLE - 12 ROUNDS
SATURDAY, JUNE 6 - MADISON SQUARE GARDEN
LAST MOVED - 05/13/98
BALLYS HILTON MIRAGE STARDUST
Henry Akinwande +350 +550 +400
Evander Holyfield -500 -750 -600
I rarely bet sports as I hate giving up EV and have no reason to think I'm a superexpert. With that disclaimer, and bearing in mind that I botched the full house prices on Sklansky's first puzzler, I hope I have the following correct:
a -x means you bet x to win $100 + x,
and a +x means you bet $100 to win $100 + x.
If this is so, one could arbitrage by betting Holyfield at Bally's and Akinwande at the Mirage thus:
Bet $520 on Holyfield at Bally's which wins $624 if Holyfield wins.
Bet $100 on Akinwande at the Mirage which wins $650 if Akinwande wins.
You're guaranteed at least $4 and at most $30. Of course, these numbers can be adjusted to guarantee something in the middle, I just did these in my head real quick to make this example work.
Now, aren't the markets efficient enough that gamblers are jumping in to bring these prices in line? If I was still in Vegas, I'd be 2nd mortgaging the house to bet these two sides(after confirming I had the numbers right of course!). Assuming I could acquire $100k, would $16k and $84k be enough to bring these prices to equilibrium? Off the top of my head, it seems like $100k of action buys you about $3-4 k of guaranteed profit over just one month. Do these situations occur often enough that I'm wasting my time here in Arizona with a day job? Or am I missing something?
Last Modified 2/9/00