TRADING PLACES (1983) - I'm glad I've found this step by step explanation online, had to read it three times but I'm glad I finally understand what the hell is going on here.
https://www.youtube.com/watch?v=UoUnvVRYzzA
The scheme "buy low, sell high" is easy enough to understand, but what is not explained is what is being bought and sold: it is not orange juice itself, but so called "futures" in orange juice.
In the commodity trade, "future contracts" is an agreement to buy or sell a commodity at a fixed price, at a certain date in the future, no matter what the market price is on that day. For example: if you have a contract to buy, and the market price has risen above the value of that future, you can purchase the commodity for the cheaper price set in the contract, and then sell it again at the higher market price. This is an instant profit, and this is what the Dukes are hoping for.
The Dukes instruct their trader to secure futures to buy orange juice. They think this is a sure bet, because they have a report that says the orange crop will be bad. With a bad orange crop the market price of orange juice will go up. So later they can buy juice at the cheap price set in the futures contract, and immediately sell at the higher market price. Everyone else sees the Dukes do this, and joins in. when everyone is buying and few are selling, the price of futures go up. So now plenty of people have obliged themselves to buy orange juice at a high price, later on.
Winthorpe's shout - that sets off the frenzy - is "SELL 200 April at 1.42". This means: "Let us agree that I will sell orange juice to you in April, for 1.42 a piece". The reason everyone is so excited is that they think in April, the price will be much higher than 1.42. This sudden change - with someone selling instead of buying - causes the price to start dropping. The buyers are still happy, because they expect the prices to be high in April.
Then comes the reveal: the orange crop is fine, hence the orange juice prices will NOT be high in the upcoming year. With that the price of orange juice will be low in April.
Now everyone that has obliged themselves to buy from others risk being stuck with orange juice they have paid a lot for. And since orange juice spoils, they MUST find someone that promises to buy it, or the loss is complete. The frenzy to sell causes the price to plummet even faster. Winthorpe and Valentine only need to wait a bit, and then they reverse course, now promising to buy orange juice from others, at a lower price. This is the orange juice they will sell to others in April, which they obliged themselves to do earlier.
In the end, Winthorpe and Valentine are left with contracts that obliges them to buy orange juice at a low price. But they also have the obligation of others to buy orange juice from them at a high price, giving them a very good profit on each of their contracts.
The Dukes of course are left with the opposite - because they bought high, and were then forced to sell low - which bankrupts them. The reason this happens immediately is because they are getting a "margin call" at the end of the day's trading. When you are trading in futures, you must have a "margin" available which is a percentage of the value of the future contracts. They do not have that much money available. Winthorpe and Valentine are fine, because they can point to their guaranteed-to-be-profitable futures and get a loan for the margin.
Submitted September 29, 2019 at 04:14PM by KalDantes https://ift.tt/2lYJ7L4
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