Reference no: EM131533303

The prize money at large poker tournaments is in the millions of dollars. To participate in such tournaments, however, players have to first pay entry fees or “buy-ins.” For high-prize events such as main events on the World Tour of Poker, these buy-ins can easily reach $10,000. Since even the best poker players lose a lot more often than they win, these buy-ins constitute significant investments for professional poker players. To finance buy-ins, such players rely on two common arrangements: "stacking" and "backing." Let’s look at stacking first. Under a stacking arrangement, a player sells a share in any prize money he or she may win at a specific tournament in return for an upfront payment that is used to cover the buy-in. Suppose, for instance, that a player wants to sell a 10% share in his winnings at a specific tournament to an investor. In return for the share, the investor would pay the player 10% times the buy-in times a “markup.” If, for instance, the buy-in were $10,000 and the markup were 1.25, the investor would have to pay the player 10%*$10,000*1.25 = $1,250 for the 10% share. A recent story on NPR describes these stacking arrangements. Listen to the story and/or read the transcript here: https://www.npr.org/2016/03/24/471684998/hedging-their-bets-how-the-pros-diversify-their-poker-portfolios (Links to an external site.) Tilisha Evans also played at the 2012 World Series of Poker main event. In contrast to Jake Balsiger, however, she relied on a “backer” to finance the buy-in. The standard backing arrangement she used is called “fifty-fifty with make up.” Under this arrangement, the backer paid the entire $10,000 buy-in. In return, Tilisha promised to pay the backer: (a.) all her prize money if she wins less than $10,000 AND (b.) $10,000 plus 50% of the difference between her prize money and $10,000 if she wins more than $10,000. Suppose the backer wanted to make Tilisha's pay more sensitive to her performance (where her performance is measured by her prize money). Which of the following changes to the backing arrangement would allow him to do so (note that you can pick more than one from the list below)? A) Only cover a fraction of the buy in and insist that Tilisha covers the rest out of her own pocket (but do not change the $10,000 threshold below which the backer gets all the prize money and above which he gets 50%). B) Reduce the $10,000 threshold below which the backer gets all the prize money and above which he gets 50%. C) Increase the $10,000 threshold below which the backer gets all the prize money and above which he gets 50%. D) Increase the fraction of the prize money that goes to the backer if prize money is above the $10,000 threshold. Reduce the fraction of the prize money that goes to the backer if prize money is above the $10,000 threshold.