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"Method for Creating and Valuing Derivative Instruments Which Are Linked to a Casinos Or a Basket of Casinos Win Rate" in Patent Application Approval...

May 15, 2014

"Method for Creating and Valuing Derivative Instruments Which Are Linked to a Casinos Or a Basket of Casinos Win Rate" in Patent Application Approval Process

By a News Reporter-Staff News Editor at Politics & Government Week -- A patent application by the inventor Peister, David Clayton (Las Vegas, NV), filed on October 23, 2013, was made available online on May 1, 2014, according to news reporting originating from Washington, D.C., by VerticalNews correspondents.

This patent application has not been assigned to a company or institution.

The following quote was obtained by the news editors from the background information supplied by the inventors: "Casino gaming is inherently risky even though the odds are weighted in the casino's favor. Casinos, which dabble in VIP gaming, are particularly vulnerable. This is because as more hands are played volatility naturally reduces; which is an application of the law-of-large numbers. VIP players are especially risky as they can win or lose a materially large sum over a small number of individual decisions. Win rate volatility is consequently more profound over the short-to-mid-term. Volatility erodes value by handicapping an operator's ability to fund operations, effectively market and can ultimately lead to balance sheet strain. Casinos often invest deeply in VIP gaming by procuring jets, building extravagant suites, and maintaining a deep branch office marketing structure. Several instances exist where a casino operator committed deep capital expenditures to the respective VIP business, only to abandon these investments when volatility becomes too onerous.

"From a casino operator's perspective, a win rate hedge structure as a derivative product provides a potentially cost effective solution to one of the industries' thorniest issues. If a speculator purchases a casino win-rate derivative contract either from a market maker or from the secondary market, she is purchasing an investment, which does not correlate with any macro-market condition, which should yield a positive rate of return over the long-term.

"Table gaming is a unique business in that no product is actually sold. Cash at the cage is the inventory and if the cage has more cash at the end of the day than at the start, then the casino had a good day and vice versa. As there is no real transactional exchange, tracking an individual player's worth is difficult. As a solution, casino use two major mechanisms to track a VIP player's worth: non-negotiable chips (popular in Europe, Australia and the US) and turnover (popular in Europe and the US). Non-negotiable chips are fast becoming the most popular method for tracking VIP table play worldwide as NNC's are easier to track, doesn't require a relationship with the patron and is much more accurate. Win rate on turnover, by contrast, is reliant on manual observation and often requires a relationship with the player. Most casinos with VIP business track either win rate on turnover or NNC win rate, but rarely both. The present invention works with either win rates although a slight modification is required for NNC win rate."

In addition to the background information obtained for this patent application, VerticalNews journalists also obtained the inventor's summary information for this patent application: "Casino gambling is, by design, a risky business. While the odds are stacked in the house's favor, casinos often lose to their largest/VIP table players over the short-to-mid-term. This phenomenon is known as win rate volatility. The method proposed is an approach for creating, valuing and/or securitizing derivative instruments which are linked to a casino's or a basket of casinos' aggregate win rate. The invention has several components, all of which are facilitated by software: (1) a method for developing a risk profile for a given casino or a portfolio of casinos; (2) a method for estimating the optimal hedging strategy for a given casino based on level risk profile, maximum wagers at the table and required liquidity/corporate finance structure; (3) a method for estimating the expected value of variances in actual win rate to the threshold win rate after incorporating the intrinsic elasticity between win rates and wager volumes; and (4) a method for developing the features required for securitizing an individual casino's or a portfolio of casino's derivative contracts.


"The accompanying drawings, which are incorporated herein an form a part of the specification, illustrate the present invention and, together with the description, further serve to explain the principles of the invention and to enable a person skilled in the pertinent art to make and use the invention.

"FIG. 1 illustrates the results of a Monte Carlo simulation for a large player;

"FIG. 2 is an illustrative derivative contract for a casino;

"FIG. 3 is a flow chart illustrating a simplified process of a casino purchasing a derivative product and a market maker selling the derivative as a financial product;

"FIG. 4 is an illustrative derivative contract purchased by a casino in one exemplary embodiment of the present invention;

"FIG. 5 illustrates the modeling of the casino's cash-flow scenarios from the exemplary embodiment of the present invention;

"FIG. 6 is a chart illustrating the material risk of the exemplary embodiment cannot be properly modeled with a normal/Gaussian curve when house win results are skewed by player bankroll

"FIG. 7 is a chart illustrating the actual risk of the exemplary embodiment of the present invention can be estimated more accurately with a probability distribution which can accommodate parameters related to shape and skew;

"FIG. 8 is a chart illustrating the probability that a given trigger will occur in light of the number of hands wager;

"FIG. 9 is a chart illustrating that hedging with derivatives can be a more efficient corporate liquidity strategy than debt or equity financing;

"FIG. 10 is a Monte Carlo simulation illustrating that the derivative hedge is not only a down-side avoidance strategy but also allows the casino to grow revenues;

"FIG. 11 is a flow chart illustrating a system for creating VIP win rate linked derivatives;

"FIG. 12 is a schematic view of the process for calculating the risk profile for a prospective reference casino or basket of casino win rate;

"FIG. 13 is a schematic view of the process for calculating expected value of the variances;

"FIG. 14 is a schematic view for determining the optimal hedging strategy;

"FIG. 15 illustrates the process for designing the features required for specifying the final terms of the derivative and terms required for securitization; and

"FIG. 16 is a flow chart illustrating the structure for derivatives."

URL and more information on this patent application, see: Peister, David Clayton. Method for Creating and Valuing Derivative Instruments Which Are Linked to a Casinos Or a Basket of Casinos Win Rate. Filed October 23, 2013 and posted May 1, 2014. Patent URL:

Keywords for this news article include: Patents.

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Source: Politics & Government Week

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