mark
M&S Wine Gums FTW
- Joined
- Jun 6, 2001
- Messages
- 5,093
i love that film, but i never really undetstood what louis and billy-ray were doing at the end there. but somebody did.
· Like conventional stock, futures contracts can be sold even when the seller does not yet own any of the commodity. A contract to sell, say, 15,000 pounds of FCOJ at $1.50 per pound in February merely indicates the seller's obligation to provide and the buyer's obligation to purchase the product at the specified price and time. It does not matter how or where the seller gets the product, as long as, one way or another, he is able to provide it at that price at that time, even if it results in a sale at a loss to him.
· In this case, Winthorpe and Valentine first "sell" FCOJ futures at roughly $1.45 per unit, a price inflated by the Dukes themselves (the Duke Brothers' buying leads other traders to believe that the Dukes are trying to corner the market, causing a buying frenzy). Then, when the price falls as a result of the release of the real crop report indicating a good harvest, Winthorpe and Valentine buy futures at roughly $0.22 per unit. Thus, for every future unit they had previously sold at $1.45, they purchase a matching amount for only $0.22, resulting in a profit of over $1.20 per unit (over 545%). Though it is not stated in the movie exactly how much they make, if they invested roughly $500,000 from a combination of Winthorpe/Valentine's investment, the Duke's money from buying the "fake" report from a fake Clarence Beeks (Paul Gleason) and Coleman's and Ophelia's savings, they would have turned it into over $2.7 million. It is strongly implied that they purchased additional futures on margin and made dozens (or hundreds) of millions more, since a lesser amount would not bankrupt the Dukes.
· At the same time, the Duke brothers purchase enormous quantities of FCOJ futures, even at relatively high prices, because they incorrectly expect that the crop report (falsely suggesting a greater need for stockpiled orange juice) will create a demand at even higher prices, securing them a profit. When it turns out that the leaked report they were given was fraudulent and the true report is revealed, the price begins to plummet before they are able to sell off their contracts. So, they are left with an obligation to buy millions of units of FCOJ at a price more than a dollar per unit higher than they can sell them for, bankrupting them. The Dukes too, are trading on margin, in order to magnify their profits (or losses, as it turns out). The first words that the exchange representative says to them after their disastrous trading session are "Margin call, gentlemen.", requiring them to deposit more money with the exchange to cover their open lossmaking position. Randolph whines, "You know very well that we don't have $394 million in cash!" Since their open position is hundreds of millions of dollars in the red, they have no further margin to deposit, they are effectively ruined, Mortimer's screams of "turn those machines back on!" notwithstanding.
· The $1.20 per pound price change on FCOJ futures that generated Winthorpe and Valentine's huge profit would be unlikely in the real FCOJ market. The exchange that houses the FCOJ futures trading imposes a daily limit of 10 cents per pound on the price movement of the near month contract from its previous day's settlement price. Most commodities futures contracts have daily limits. After the FCOJ price is 10 cents away from the prior settlement price, trading is halted and the market is referred to as "limit up" or "limit down". Trading reopens if prices are again within the limit, and the next day the price can change 10 cents again. The price limit can be widened under certain market conditions.
· Like conventional stock, futures contracts can be sold even when the seller does not yet own any of the commodity. A contract to sell, say, 15,000 pounds of FCOJ at $1.50 per pound in February merely indicates the seller's obligation to provide and the buyer's obligation to purchase the product at the specified price and time. It does not matter how or where the seller gets the product, as long as, one way or another, he is able to provide it at that price at that time, even if it results in a sale at a loss to him.
· In this case, Winthorpe and Valentine first "sell" FCOJ futures at roughly $1.45 per unit, a price inflated by the Dukes themselves (the Duke Brothers' buying leads other traders to believe that the Dukes are trying to corner the market, causing a buying frenzy). Then, when the price falls as a result of the release of the real crop report indicating a good harvest, Winthorpe and Valentine buy futures at roughly $0.22 per unit. Thus, for every future unit they had previously sold at $1.45, they purchase a matching amount for only $0.22, resulting in a profit of over $1.20 per unit (over 545%). Though it is not stated in the movie exactly how much they make, if they invested roughly $500,000 from a combination of Winthorpe/Valentine's investment, the Duke's money from buying the "fake" report from a fake Clarence Beeks (Paul Gleason) and Coleman's and Ophelia's savings, they would have turned it into over $2.7 million. It is strongly implied that they purchased additional futures on margin and made dozens (or hundreds) of millions more, since a lesser amount would not bankrupt the Dukes.
· At the same time, the Duke brothers purchase enormous quantities of FCOJ futures, even at relatively high prices, because they incorrectly expect that the crop report (falsely suggesting a greater need for stockpiled orange juice) will create a demand at even higher prices, securing them a profit. When it turns out that the leaked report they were given was fraudulent and the true report is revealed, the price begins to plummet before they are able to sell off their contracts. So, they are left with an obligation to buy millions of units of FCOJ at a price more than a dollar per unit higher than they can sell them for, bankrupting them. The Dukes too, are trading on margin, in order to magnify their profits (or losses, as it turns out). The first words that the exchange representative says to them after their disastrous trading session are "Margin call, gentlemen.", requiring them to deposit more money with the exchange to cover their open lossmaking position. Randolph whines, "You know very well that we don't have $394 million in cash!" Since their open position is hundreds of millions of dollars in the red, they have no further margin to deposit, they are effectively ruined, Mortimer's screams of "turn those machines back on!" notwithstanding.
· The $1.20 per pound price change on FCOJ futures that generated Winthorpe and Valentine's huge profit would be unlikely in the real FCOJ market. The exchange that houses the FCOJ futures trading imposes a daily limit of 10 cents per pound on the price movement of the near month contract from its previous day's settlement price. Most commodities futures contracts have daily limits. After the FCOJ price is 10 cents away from the prior settlement price, trading is halted and the market is referred to as "limit up" or "limit down". Trading reopens if prices are again within the limit, and the next day the price can change 10 cents again. The price limit can be widened under certain market conditions.
