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
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-
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.