Pricing Bespoke Bets by Approximating Them with Liquid Options
Summary
The document considers whether a counterparty could create a market for a one-off wager on a political or other niche event, potentially with custom odds, commissions, stake limits, and restrictions on early exit. The reply emphasizes that pricing depends on whether the wager is tied to a liquid financial instrument or instead carries event-specific risks that cannot be hedged.
A common approach is to simplify a complex exposure into the closest liquid options market and use that as a pricing reference. This can help anchor odds or spreads when the event has a meaningful market relationship. The answer is brief and does not explain how to price a wager on an unhedgeable event, assess its probability, or structure legal and operational terms. The proposed approximation therefore may not apply when the event has no close liquid proxy.
Key ideas
- The availability of a liquid hedge or market proxy strongly affects pricing for a bespoke bet.
- Event-specific risks that cannot be hedged can lead to different odds and spreads.
- A complex exposure may be approximated using the closest liquid options market.
- The proposed proxy method does not resolve pricing when no suitable liquid market exists.
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# Trade anything? # Trade anything? I have a question after reading the post below. https://www.onlinebetting.org.uk/betting-guides/can-you-bet-on-anything-you-want.html Question: I want to bet on a niche topic or asset or anything that is not already traded anywhere else. Example:I want to bet that country X would ban a certain substance Y in 2022? Are there corp/entities that welcome bets on any topic/asset? The corp/entities decide if they want to take the other side of the bet or not. If they like my bet, they propose a market structure to me including the commissions, odds, minimum staked amount, and the other terms of the bet. If I am fine with the market structure, then they would make the market for me. A term on the bet could be to restrict trading in and out of the bet once it is purchased by me. That means I must always wait for the bet to expire, and can not sell my bet prior. In this scenario, it makes it easier for the market maker to avoid unnecessary hedging. I am fine with such a condition. The market is similar to an OTC. However, OTC is not opened to everyone except institutional investors, who can trade on OTC. Also, OTC is primarily for financial derivatives and not for random bets on a substance Y. ## Answer by demully (score 0) https://quant.stackexchange.com/a/66162 Is your trade on a liquid financial instrument; or is "related" to markets with idiosyncratic (and thus unhedgeable) funnies??? That makes a huge difference to the prices/odds/spread-differentials offered... SOP is to simplify the complex into the closest approximating liquid options...
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.