Adding fixed income and derivative products to your friendly game of Monopoly: A practical approach

Despite the proliferation of Monopoly game board variants, the rules themselves have changed little (if at all) to accommodate the financial innovations of the last 100 years. This can be rectified largely by expanding the Monopoly rules to include a range of fixed income products and derivative instruments. Implementation is not nearly as difficult as you might imagine.

These suggestions hinge on the expansion of the role of the banker. He doesn’t need a game piece, either. I suppose he could take one just for funsies but he can’t move it around the board. His goal is simply to make as much money as possible.

Financial Innovation

Players may still take mortgages per the traditional rules. However, they may also issue bonds to finance purchases. It is the banker’s responsibility to coordinate issuance of the securities (you can jot terms on a notepad) and ensure principal and interest are paid in a timely fashion. The issuing player and banker may structure notes however they see fit. Coupon bonds and floating rate notes are both fair game. There is no reason you can’t implement bonds with embedded options, either (see Deriving the Yield Curve below).

In addition, the banker may securitize outstanding mortgages. That is, the banker may sell the cash flows from player mortgages to other players. There is no limit to structure (though again, you should definitely write down the terms of these securities). Passthrough securities are probably the easiest structures to implement in-game. It may be wise to standardize the terms of collateralized mortgage obligations ahead of time.

Not enough game pieces for all your friends? Consider having groups of players adopt a real-estate investment trust type structure (haven’t thought through the details of this, yet).

And of course any reasonable banker will charge fees for his services.

Deriving the Yield Curve

Introducing fixed income securities to your friendly game of monopoly will require you to develop a yield curve.

I suggest using the “round” as the basis for the term structure, and random dice rolls to determine the rates at each point along the curve.

As an example, suppose you would like to create a six-turn yield curve. You could roll a die 6 times (once for each term). Simply take whatever number you roll and double it. Having established market interest rates in this fashion it is straightforward to implement fixed income trading into the game. Just make sure to bring your HP12-C with you to game night.

Deriving a yield cure also presents the opportunity for introducing more complex fixed income and derivative products. The 1-round rate, for example, could serve as the benchmark for floating rate notes, as LIBOR does in real life. Issuing players and the banker may add spread as needed to generate interest in their products. This of course opens the door to interest rate swaps and forward rate agreements, though the pricing of such derivative instruments is not a topic I will explore here.

Obviously this procedure will lead to an extremely volatile term structure. Which of course is the whole fun.

All of which leads us to…

How the Banker(s) Lose

To this point I have been talking in terms of one banker. However, there could easily be two, three, or four bankers (you may not even need much paper money, if you can trust your friends to keep an honest set of financials on spreadsheet software – perhaps a subject for another post).

The banker(s) will need to receive some quantity of beginning capital, with which he/they must also a maintain reserve. Let’s make it easy and say 25% of beginning capital.

We could assume the banker’s cost of funds is equivalent to the one-round interest rate described above. The banker must pay his funding costs explicitly each term, as well as meet any obligations she has incurred through lending and securities issuance. If the banker fails to meet these obligations, or depletes his reserves in meeting them, his bank goes bust. It is then up to all the players to hash out what becomes of his assets and liabilities. This translates to a relatively elegant implementation of financial crises, and possibly even bailouts.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s