Explaining the climax scene of "Trading Places"

Eddie Murphy's Trading Places is one of my favorite movies of all time. However, I have always felt a twinge of guilt when I watched the movie with other people.

You see, here's my deep dark secret: I don't really understand what happened during the climatic scene at the commodities exchange! Lucky for me, Wikipedia has the answer:

"With the authentic orange crop report indicating a good harvest of fresh oranges, frozen concentrated orange juice (FCOJ) would be less important to food producers and so would be likely to drop in price once traders heard the news. However, by way of a fraudulent report, the Duke brothers are led to believe that the orange harvest would be less successful, necessitating greater demand for stockpiled FCOJ in orange products in the coming year, thereby driving the price up. By capitalizing on this knowledge (and the Duke brothers' missteps), the protagonists are able to profit by manipulating the futures market as follows:

Understanding futures contracts. Unlike conventional stock, futures contracts can be sold even when the seller does not yet own any of the commodity. A contract to sell, say, 1000 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

Here's the scam. 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%).

The hard numbers. 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.

"Looking good Billy Ray... Feeling good Lewis!" 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." Link

There! Finally I can enjoy the movie in public without shame. (Big thanks to plcmts17 for pointing me to the Wikipedia article. I totally owe you a dollar.)

(Photo credit: yinnxp under Creative Commons Attribution 2.0 license.)