I know this isn’t CS but this really isn’t a CS question. In Trading Places, I understand why Dan and Eddie’s characters are selling their stocks of OJ while the price is high, but why do they all of a sudden start to buy when the stock is hit low? That I don’t get. I mean, is there any logic to this? Buying a bunch of stock that low?
Having previously sold a lot of futures contracts (as opposed to stocks) that they don’t own, at a very inflated price, they now have to buy the contracts that they are expected to deliver in five days, at a very deflated price. They profit on the difference. Had the price gone up, they would have been in the ones who lost.
Tris
Here’s a previous thread on this:
“Trading Places” the Movie, which had a link to this helpful description:
The wikipedia article also give a great explanation:
One of the things which sometimes confuses about futures trading is the role of the Exchange. Say trader A wants to sell 1000 tons of lima beans and trader B wants to buy, they enter into a futures contract which specifies a date on which the transaction takes place and a price. However, trader A does not have to deliver to trader B, merely to a designated place specified by the Exchange, and trader B can pick up his beans similarly. The beauty of the system is that now trader A can agree with trader C to buy 1000 tons of beans. Trader A now has no obligation to buy or sell a single bean because, via the Exchange, trader C now supplies all trader B’s beans. If trader A is a canny operator he will have agreed to sell the beans to B for more than he agreed to buy from C, and he can walk away with the difference in cash. If later B and C get together and agree that B will sell his beans to C, then no actual beans need be traded at all and each trader gains or loses on the difference in price.
Sell high, buy low!
Formally known as a short sale and a short cover.
One reason the futures market exists that companies like to take precautions against the cost of raw materials rising abruptly.
So an food company might take a fixed price for orange juice in 3 months time. meanwhile speculators can have a go at assessing the likely crop yield (considering weather conditions) and promise to sell at that price.
If the weather is good in 3 months time and oranges are plentiful, then orange juice will be cheap to buy and the speculator makes a profit. But the company has ‘peace of mind’.
As glee said.
To give another example, part of the reason why Southwest Airlines was profitable after 9-11 when the other airlines tanked was because of their successful handling of fuel futures. They were paying a lot less for jet fuel than the other carriers.
They still are. But what happens if their “provider”, for a lack of better term, reneges or fails to deliver whatever commodity at the stated price? Does that happen?
Is it really that crazy on the stockmarket? If it is, how could anything even operate?!?@
Technically, it was a commodity exchange not a stock exchange but I imagine they operate pretty simularly.
Yes, it is pretty confusing. It took me several viewings and a bit of research into the stock market before I worked out what was happening.
Firstly, it concerns dealings in the commodities market, specifically stockpiles of frozen concentrated orange juice (FCOJ). The value of FCOJ depends on the current availability of fresh oranges. If there is a poor harvest then FCOJ becomes valuable. If there is a good harvest, with fresh oranges in plentiful supply, FCOJ becomes near worthless.
Secondly, when buying and selling shares and commodities, the rules allow a trader to sell commodities BEFORE he has bought them, and then aquire them later. So, he can for example sell 1000 units of FCOJ at $5, even though he doesn’t own them. Then he has to buy the 1000 units to pass on. If the price has fallen between selling and buying, he makes a profit. If the price has risen, he has to pay the higher price, and makes a loss. This is called “SELLING SHORT” and its a perfectly legitimate practice.
Now that you understand that, heres the plot:
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The brothers have sent their spy to report on the orange crop. The report says there is a good harvest. This would put down the price of FCOJ. -
Dan/Eddie steal the report, and substitute a false report, saying there is a poor harvest. This would increase the price of FCOJ. -
The brothers instruct their brokers to buy stocks of FCOJ, thinking that it will increase in value. All their purchases trading causes the price of FCOJ to go up. -
Dan/Eddie wait while the the brothers push up the price, then when it hits a certain value, they begin SELLING SHORT, and sell large quantities at high price.
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Then the government publicly announces the real state of the orange crop. The harvest is good, so the price of FCOJ plummets. -
Dan/Eddie are able to buy at very low price.
So, Dan/Eddie have sold short at about $7 then bought at about 3 cents, while the brothers have bought at $7 and sold at three cents. Dan/Eddie make a profit in 10’s of millions, and the brothers go bust.
The exchange does gives them a “margin call” as well indicating that they have to pay up everything right away which they can’t do because they were trading with money they didn’t actually have (I think it was something like $300,000,000 owed). That forced them to be completely broke.
The Barings Bank collapsed when it lost on futures contracts. Presumably it did so owing bigtime.
The IMDB trivia page on this movie says, I believe, that there are rules in place on the RL stock exchange to keep this from happening. If you’ve ever heard of “trading being stopped” on particular companies at volatile times in the past, I think that’s an example of those rules.
Commodities Exchange != Stock Exchange
Thank you and goodnight.
Real trading floors such as CBOT (though few remain, mostly electronic now) can appear to the outsider to be completely manic, particularly when trading is about to end - and that is on a normal day.
The Exchange underwrites all trades.
I think futures contracts are settled at the end of the applicable day, unlike stocks which have a settlement date a few days later?
Search the board for “trading places”.
This has been done dozens of times.