Tuesday, 27 April 2010

Popularity and taxes

Matt's today also launched some pretty interesting conditional contracts.

Right now, trading suggests there's a 74% chance of National setting the top marginal tax rate to the 33-34.9% range for next year; there's also a 90% chance that the GST is increased by the end of this year.

Matt's launched conditionals on National's polling outcomes in the first Roy Morgan poll of June 2010: the contracts pay out at $1 if National polls in the specified range AND if the budget sets the top personal tax rate equal to or below 33% and if National has scheduled a GST increase before the end of 2010.

The sum of bids across the unconditional contracts is 0.97: just a bid-ask spread.

The sum of bids across the conditional contracts is 0.6871. So, about a 30% chance that the condition doesn't obtain. There's about a 70% chance that the top marginal tax rate drops to 0.33 or lower and that GST goes up before end-year. If we divide the high bids by the sum of all bids for each set, we get the following:
Very low (less than 46.5%)10%16%
Low (46.5% - 48.5%)28%21%
Mid (49% - 51%)32%35%
High (51.5% - 53.5%)24%21%
Very high (over 53.5%)6%7%
The market's saying that there's some reasonable downside polling risk from the tax reform package. Recall that the price difference between these two markets understates the risk: the left hand column is unconditional, not conditional on the opposite. So the chance of the tax package being implemented is already built into the former price.

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