From: ichudov@algebra.com (Igor Chudov @ home)
Date: Sun, 3 Nov 1996 20:36:30 -0800 (PST)
To: stewarts@ix.netcom.com
Subject: Re: anonymous oddsman
In-Reply-To: <1.5.4.32.19961103102631.0039bfa4@popd.ix.netcom.com>
Message-ID: <199611040431.WAA16905@manifold.algebra.com>
MIME-Version: 1.0
Content-Type: text


stewarts@ix.netcom.com wrote:
> 
> At 04:55 PM 11/2/96 -0600, you wrote:
> >Igor Chudov @ home wrote:
> >> >               Prices @ 09:21 GMT Sat 2nd Nov 96
> >> >         +---------+----------------+----------------+
> >> >         |         |  Ladbroke's    | William Hill   |
> >> >         +---------+----------------+----------------+
> >> >         | Clinton | Not currently offered by either |
> >> >         | Dole    |     6:1        |     10:1       |
> >> 
> >> Whew! They are wide open for arbitrage! Suppose that at Ladbroke I sell
> >> an obligation to pay $6 if Dole wins (they are apparently valuing it for
> >> this much), collecting $1. At the same time, to hedge my exposure, I go
> >> to "William Hill", and purchase their obligation to pay _me_ $10 if Bob
> >> Dole wins, paying the $1 bill that I just got at Ladbroke's.
> >> If bob dole loses, I lose nothing. If he wins, I make $4 out of air.
> >> I wonder why the beting markets are so imperfect.
> 
> Unless I've been misinterpreting the charts, you can't do it.
> You can go to Ladbroke's and put down a pound on Dole, 
> and if Dole wins they'll give you 6.  But if you want to bet that
> Dole will lose and Clinton will win, they'll tell you
> "Of course that's going to happen, silly.  Keep your money."
> Both houses are still willing to take the risk that Dole will win
> and give you odds on it; neither house is willing to take any 
> additional risk involving paying people money if Clinton wins;
> they've found all the takers they want for that.

If I am not mistaken, your objection has merit. My argument, however,
does not require one of the houses (Ladbroke's) accepts the reverse bets
(which pay me money of Clinton wins). My argument runs like this. There
are persons hanging around Landbroke who apparently think that if they
give Landbroke $1 in return for the promise to pay them $6 if Dole wins,
they get a good deal.

It is these people together with "William Hill" whom we exploit.

What I do is the following: I go to the Ladbroke's and offer to pay the
gamblers not $6, but $6.01 if Dole wins. Being somewhat rational, these
traders gamblers see a better deal than Ladbroke's offers, and
give me their $1 bills. This is very simple.

I take their $1 bills and run to "William Hill", where I take another
side of the bet. 

If Clinton wins, I get nothing and lose nothing. If Dole wins, I gain
$3.99 on every bet that these suckers agreed to make with me.

That was the essense of arbitrage that I propose.

Again, as I said, there is a way to make sure money on this 
situation, that is, to make money even if Klinton wins.

The arbitrage strategy is the following: as before, I go to the
Ladbroke's and offer to pay them not $6, but $6.01 if Dole wins.
I take their $1 bills and go to "William Hill". I buy, however, LESS
bets than dollar bills that I received. In particular, I buy 
$6.01 / $10.00 bets for each dollar that I receive.

The remaining money $1(1-6.01/10) I simply take to my bank. This money
is mine: if Clinton wins, nobody gets anything; if Dole wins, I get
exactly enough money from "William Hill" to pay off my debts to the
gamblers at Ladbroke's.

	- Igor.