End Explanation of the movie Trading Places

End Explanation of the movie Trading Places

I’ll try to explain this simply but stock stuff can be extremely complicated and I am no expert.

The quick answer is that the two brothers’ firm ends up with a butt load of FCOJ futures contracts that they can’t pay for at the end of the trading day. Can’t pay, they shut you down. Dan and Eddie have FCOJ contracts that cost them little but sell for a lot, so they get rich.

The long answer:

Lets say the current price is $50 for 1000 oranges. However no one has the oranges, they are still growing. JuiceMan contracts to buy 1000 oranges. He will get 1000 oranges at harvest and is obligated for $50. The contract closes at harvest. However he can sell this contract before harvest That’s how all this starts.

So if JuiceMan thinks, at harvest, oranges will be more expensive, say $75/1000, he can collect his 1000 oranges, pay $50 and then sell those oranges to MinuteMaid for $75 and pocket the $25. If he thinks oranges will be cheaper at harvest, he will try to sell his contract to another buyer for $50, maybe less so that he gets his money now and when the oranges are harvested, the other buyer pays $50/1000 oranges but only gets $40 from MinuteMaid, He loses $10. So JuiceMan knowing something the other buyer doesn’t, is how he can pull this off. This works for any commodity where the price fluctuates, regardless of the reason. Oil is by far the most visible of the commodities that trade this way.

Orange crops are dependent on the weather. So if good weather, lots of oranges are picked, the surplus causes the price to drop AT HARVEST time. If the weather is bad, freezing for oranges usually although it could be from a hurricane (assuming Florida), that causes the orange crop to be smaller AT HARVEST. Oranges become more expensive.

So in the movie, Dan and Eddie discover the brothers are going to steal an advanced copy of the orange crop report. D & E swap a fake report for the real one. The fake one says the orange crop was going to be bad, therefore oranges will become more expensive at harvest. The two brothers buy as many FCOJ contracts as they can at the starting price or as it goes up. There’s a scene that shows how the price goes up as they buy. Trading stops as the crop report is read. The crop report is revealed to be good news so there will be an excess of oranges, driving the price down. So the brothers own all these contracts they bought at the starting price or as it went up and owe that amount of money. The price at the end of the scene shows that the price has hit rock bottom and no one is buying FCOJ anymore because they all bought it thinking it would go up in price. D&E buy those contracts knowing that when it’s all said and done, they will pay the bottom price but get the amount on the contracts. This is where they kind of lose me.

To sum, D&E hold contracts that cost the lowest price but sell for a higher one. The brothers hold contracts that cost a high price but sell for the low price. The reason they want to reopen the pit is that if they can get someone to buy the contract, they aren’t obligated to pay anything. But trading is closed. The rules appear to be, end of day, pay for your contracts or else.

Lordy that’s a long answer for what appears to be such a simple plot device in the film. The key is that they can’t pay, so it bankrupts them. I just read a book called The History of the US in Five Crashes. It goes through the five major stock market crashes of the 20th and 21st centuries in pretty good detail and in an understandable way. All five had the same greed factor as the scenario above. It’s an excellent read.

And if I got this wrong, I apologize but I should be close. What has always baffled me is how the D&E were able to get into the buying and selling so easily and such. Maybe someone else could explain that.