Last week, we celebrated the 30th anniversary of Trading Places, the greatest movie about finance ever made, with an oral history of the film.
There are so many unforgettable moments.
But we wanted to zero in on what is arguably the most complicated, real-life climax in cinematic history.
Earlier in the film, Mortimer and Randolph Duke, the two corrupt, septuagenarian brothers who run a commodities brokerage house, arrange to get an advanced copy of the USDA’s monthly orange crop report. These crop reports are real, and you can find a calendar of them here.
The Dukes hope to discover that the crop report will reveal extensive damage to the Florida orange juice crop — due to a hard freeze — and thus they could make a fortune buying a ton of orange juice futures right before that data comes out, on the premise that the freeze would cause a shortage of oranges.
Billy Ray Valentine (Eddie Murphy) and Louis Winthorpe III (Dan Aykroyd) — who’s lost his job at the brokerage — catch wind of the scheme, and they deliver to the Dukes a faux report that confirms what they want to hear, that the crop was badly damaged. (In fact, the real crop report showed that the freeze wasn’t that bad)
Not knowing the real crop data, the Dukes plan is to book as many orders for high bids as possible — “corner the market” (which in real life, thanks to new regulations, is now either illegal or extremely difficult to pull off).
Here’s their floor broker, Wilson, set to pull off what he thinks is a foolproof moneymaking trade. He’s been instructed to buy Frozen Concentrated Orange Juice futures non-stop until the crop report comes out.
Meanwhile, Winthorpe and Billy Ray wait get the Dukes to flood the market with bullish orders to drive the price up:
But they need to leave enough time before the crop report is published to book as many short orders as possible. Basically, Winthorpe and Valentine are SELLING frozen concentrated orange juice futures en masse, with the knowledge that the crop report will show no hard freeze, implying bountiful oranges, which will cause the price to collapse.
Winthrope and Valentine need to show some patience, as shorting anything is only preferable once the price is very high.
The floor needs to think they can make even more money on a bullish report by trading with the guys selling at lower prices.
Eventually, Winthorpe decides the time is right, and calls out that they are selling contracts for ¢142. The floor will want to lock in that price because they think the report will cause the price to go even higher.
Were the price to go up, Winthorpe and Billy Ray would be screwed, as they’d have to buy back the contracts they sold (shorting anything requires a later purchase) at a higher price.
But when the crop report comes out, the tables are turned. The harsh winter did NOT hurt the crop.
Now everyone has to sell! There are plenty of oranges out there. There’s no shortage at all.
Winthorpe and Billy Ray now wait again for the price to come back down, to max out the spread between what everyone they sold the contracts for initially, and the price at which they can buy the orders back:
Finally, they must also not take the post-report sell orders from the Dukes, to maximally screw them over.
Eventually the price settles at ¢29:
The Dukes are ruined. They were buying all the way up, but the prices in the end collapsed.
And Winthopre and Billy Ray are the ones who’ve made out like bandits:
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