Explaining the climax scene of "Trading Places"

By Will Chen on 26 December 2006 (Updated 10 June 2007) 22 comments

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:

oranges at marketUnderstanding 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.)

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Will Chen's picture

Faos pointed out that the "climax" scene in Trading Places was "when Jamie Lee Curtis took her sweater off."

Points taken.

I should probably edit the title, but now I kinda think it is funny so it stays!

Guest's picture
tiff

haha i thought you were going to talk about something kinky too and was kinda disappointed. but it was a good read anyway. thanks! :-D

Paul Michael's picture

It has bugged me for years. A great movie with a fab cast, and my limited knowledge of the stock market stumping me as to how buying for a high price and selling for a low price would make money. Can I DIGG this story? Someone needs to.

Will Chen's picture

Now I don't feel so alone in my confusion.  Thanks Paul!

I'll take a rain check on the Digg.  Maybe we'll revisit it around Christmas, when they tend to play this movie nonstop.  Thanks for the thought, though.  =)

Guest's picture
Derek

Weird thing is, I thought I was the ONLY one who didn't know what the heck was going on either!! You've put to rest one of those lingering unanswered questions I've always wanted resolved...and I'm NOT joking!! Thanks a LOT!

Guest's picture
Brian

At long last- I also could never understand how they could sell before they had bought...

Julie Rains's picture

When it's equities being traded, selling what you don't have in anticipation of buying the equity at a lower price and then delivering it a few days later to receive the higher price is called selling short, just in case anyone wanted to know that tidbit. I'm reading one of Jim Cramer's books and he is talking about that now.

Wikipedia is a great source (generally, I have found) for explaining finance terms.

I suppose I am boring but I did think that the climax scene would be about finance.

Guest's picture
Guest

I just saw it (again for the 100000th time), and never could understand it, and always had this tinkle on the back of my mind about it, so thank you for thAt...

Guest's picture
yinnxp

Hi, Will Chen.

Thank you for using my photo ( oranges @ yinnxp's Flickr )

kindly contact me at the email provided :)

Guest's picture
Xiang Yinn

Hi Will Chen,

Thank you for using my photo taken from yinnxp's flickr.

kindly contact me with my email as provided.

sincerely,
yinn

Guest's picture
Tierna

Thankfully I put the right search terms into Google to find this post!

I have seen this movie at least 7 times and NEVER understood how they "won" at the end. I used to work for a commodities brokerage and retained exactly nothing from it because it seemed like imaginary number in math...made no sense to me.

Thanks for explaining it in a way I can finally grasp!

Guest's picture
Guest

FINALLY!!! I GET IT!!! I can't tell you how many nights I have laid awake (only after every viewing actually) trying to figure out how they busted the Dukes. Thank You !!!

Guest's picture
Guest

You got the highlights correct, but missed some key points:

1. They are not buying at 1.42 and selling at $0.22 exactly. They are buying and selling at the market rate, which changes as a consequence of their actions. When they are selling, they start selling at $1.42 and stop selling when the crop report is announced, where the price is at $1.02. For ease of calculation, we can think of it as them trading on average at $1.22.

2. Once the crop report is announced, they wait a bit and then start buying at $0.46 and keep doing so until the end of trading, when the price is at $0.29. So we can think of their average buying price as $0.375.

3. The contracts they are buying and selling are for 15,000 units each.

4. The fact that the Dukes were trading on margin is independent of whether Billy Ray and Lewis do. In fact, Billy Ray and Lewis deliberately do not trade with the Duke's trader, so that they will be left holding a bunch of expensive "buy" contracts at the end of the day. However, it seems likely that Billy Ray and Lewis were trading on margin, since that is the only way to turn $500k into F-U money for 5 people.

Guest's picture
Guest

questions. Why didnt billy ray and lewis just wait for the price of FOJ to drop at its lowest before they start buying? I mean why did they start buying knowing the price is continuously going down? wouldnt they make more money if they bought the commodity at the following trading day where the price is at its lowest?

tnx for the clarification, i been wondering the same questions ever since i watched the movie...

Guest's picture
LauritZenc

You beat me to it on point 4], about the trading on margin.

I always assumed that they moved 20,000 contracts based on Winthorpe saying "20,000" at one point.

So a better estimate of their profit based on your figures is:

(122 cents/pound - 37.5 cents/pound) * 15000 pounds/contract * 20000 contracts = $253,500,000.

Guest's picture
Guest

That was the fricken best explination ever. Its true you wallstreet guys are wicked smart

Guest's picture
Guest111

Thanks! I couldn't get my head around that.

Guest's picture
Guest

Thank u! Been watching for years and never understood how in the hell they did it...great movie one of all time favorites

Guest's picture
Guest

Thanks a lot! This helped me understand the movie.. My professor told us to watch this movie and when that scene came out, I was like...what the hell is going on? haha

Guest's picture
Guest

The math is a little off in the examples but the ideas are right. In the movie, they have to settle for "$394 million" due to the margin calls. The math you used was correct, but the numbers you supplied were wrong. Your estimation was that $2.7 million changed hands but here's the real math:

High price was $1.45. Low price was .29 with most trades happening in between. With FCOJ futures, every contract is for 15,000 pound of orange solids. So in practical terms every contract is for 15,000 pounds of OJ at $1.45/pound. So let's look at one trade you can hear which is "200- $1.45 April!". In English that means that the person A is promising to buy and seller B is promising to sell 3,000,000 pounds of orange solids at $1.45 per pound due in April (a $4,350,000 transaction). Now there are two ways that the contract can be satisfied- deliver 3,000,000 pounds of oranges OR buy another contract for 3,000,000 pounds of oranges at a different (preferable lower price). So what really ends of happening in the movie is this the Dukes' broker buys contracts like crazy believing that the crop is bad (less oranges coupled with same demand means higher prices). But when the crop turns out to be normal the "fit hits the shan" for the Dukes but not for the good guys. They start selling contracts at $1.42 (a $4,260,000 if it was a 200-1.42 April). That means that in the example they made $90,000 on their first trade and $3,480,000 on their last. Couple that over several tens of thousands of contracts and Billy Ray and Lewis could conceivably walk away with BILLIONS in gains. Also, the cash they hand on hand didn't really matter, as they were trading on margin. I hope that clears it up the movie.

Now to real life; this could never happen because it would cripple an entire industry, country, world economy, etc. The price of a commodity will be stopped if it ever fluctuates more than 10 cents (either direction) during one trading day. You can understand why- if somebody drives the price up 10 cents by themselves, they either know something (and they will spend the better part of their lives in prison) or they are setting themselves up to be bankrupt.

I know that's long, boring (to most of you), and a little confusing but I hope that sheds some light. Also, this is NOT the "stock market". This is commodities trading. There are some pretty good documentaries on Netflix explaining commodities trading (which is now done online because the "pits" are gone). As a word of caution, please don't trade commodities if you are reading this. Leave it to the pros. You all know enough now to ruin your financial lives if you believe for one second that you can do this.

Guest's picture
Guest

I just said "ohhhhhhhhh!" out loud so hard while reading your second paragraph. Thank you for the explanation!!

Guest's picture
Guest

I just watched the movie again for the umpteenth time, and your explanation moved me closer to understanding the deal than any of the others. But it still left me wondering how this all started? I've read that it began in Japan in the 17 the century with buying and selling "rice tickets." But I still don't get it.

I still don't get "future's". Could you break it down even more? Explain EVERY single step of the Japan rice selling and then tell how it has evolved to today's futures trading?

I tried to reason it out: let's say merchant A has no money but signs a contract to buy 1000 lbs of rice on Jan. 1. The contract is called a "rice ticket." He agrees to buy the warehoused rice at a certain price, say 20 cents per lb. He is hoping he can turn around and sell it to grocery stores for 40 cents a lb a few days later. But in order to get the money to pay for the rice on Jan. 1 he sells his ticket (contract). So now he has money to pay for the future debt--but he no longer owns the product. Dead end. Where did I miss something?