Pricing options on film revenue

This article illustrates two models for cumulative revenues from films, a time-changed gamma process and a compound Poisson process, and how these models can be used to price options. Don Chance, Eric Hillebrand and Jimmy Hilliard find that while both models lead to option prices that accurately reflect discounted future option payouts, the gamma process model is easier to implement

Hedge funds and private equity firms have shown an increasing interest in films as a form of investment.1 It is generally believed that revenues from films are uncorrelated with the investment performance of traditional asset classes, thereby suggesting that films can themselves be considered an asset class. Thus, investors seeking improvements in diversification and possibly new sources of alpha should be interested in direct and indirect investment in films.

Films are, however, an extremely