A question about the commodities scene in TRADING PLACES

[Sampiro]

If you’re familiar with the movie then you know the one I’m talking about: Winthorpe and Valentine (Akroyd and Murphy) bankrupt the Duke Brothers (Ameche and Bellamy) while making millions by using and falsifying insider information about the Frozen Orange Juice Concentrate market. I couldn’t understand exactly what happened in this scene (though I still liked the movie [except for the gorilla part]) until reading the Wikipedia entry.

So I get the basics: Winthorpe and Valentine sell futures that they don’t own at 1.42 per pound, then buy the futures to fill the same contracts at from .46 to $.29 per pound, making a big profit on every trade. Per the wikipedia article

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 Dukes’ money from buying the fake report from Billy Ray posing as Clarence Beeks, and Coleman’s and Ophelia’s savings, they would have turned it into over $10 million.

Okay, this is what my questions are about, and please don’t be afraid of insulting my intelligence for I don’t have any on the subject of finance:

Going into that scene, Ophelia (the prostitute) gives W&V her savings (about $40,000) and so does Coleman (the butler- who let’s say has about 100,000) and they have the bribe money from the Duke Brothers (not sure if it said, but let's go with the half-million above). What exactly is the purpose of this cash? Is it used to pay for the FJOC bought at .29 to $.46 at the close of the day?

If so, how do you get from the half-million to the 10 million amount above? Because, even assuming most of what they bought was at the .29 price and sold at the $1.42 price, that should only have between quadrupled/quintupled their money, earning them about $2 million.

Again per wiki-

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. Likely, the bribe money for Beeks that Valentine received was enough to leverage such a massive loss from the Dukes.

Please explain this. My understanding is that buying on margin means your money is basically something like a charge account at a brokerage- they float you the money in exchange for a fee and your guarantee to always keep the value of the account at X above the purchase price. Somebody, however, has to actually have the money.
Who, in the case above, would be Winthorpe/Valentine’s brokerage and spot them the cash to buy hundreds of millions of dollars worth of concentrate? W&V are essentially broke except for $500,000 above and the Duke Brothers certainly wouldn’t have guaranteed their purchases.

In other words, how could you buy $100 million worth of anything without proof you’re good for the money?

I know it’s just a film, but this is just one of those things I’ve always wanted to understand better.

Thanks-

[lobotomyboy63]

I’ve never understood that scene either.

A partial solution, though, may be that it wasn’t that W/V bankrupted the Dukes singlehandedly. Yeah, the Dukes may have lost $10M “to” W/V, but ALSO millions to other investors.

And basically if you had $100M in one stock, and that stock declines to 1/5 it’s value, you would have lost $80M if you sold it that day. Since they couldn’t pay off their debt with readily available, liquid assets, they couldn’t pay the day’s balance.

Liquidating their (now deeply damaged) assets to get the cash to pay it off would have to wait till the market opened. Remember the Duke brother saying, “Get those men back in here! Turn those machines back on!”? That’s how I saw it, at least.

[Gorsnak]

Two past threads on the subject with a couple informative posts:

Explain the stock exchange scene in Trading Places?
Wall streeters…explain what happens in Trading Places

Some of your questions are answered in those, but I’m not sure all of them are.

[Dewey_Finn]

I assumed that Winthorpe and Valentine made an amount comparable to the $394 million margin call faced by the Dukes. But weren’t both they and the Dukes guilty of insider trading?

[cletus]

Trading on margin:

For stocks this means you must have 50% of the value of the stock in cash and the brokerage will lend you the other 50%. If you have $500,000 you could buy $1,000,000 worth of stocks. By using leverage you are controlling $1,000,000 worth of stock with just $500,000

For futures the leverage is much greater, IIRC it’s something like 3%. If you have $500,000 in cash you could control $16,666,667.

It’s late here and I really should sleep so I’m not sure my math is right but you get the general idea. They needed that $500,000 to open a account and be allowed to leverage themselves. The rest was easy thanks to that crop report.