I’ve never really understood how the Eddie Murphy and Dan Ackroyd characters in this film managed to ruin the Don Ameche and Ralph Bellamy characters at the end while simultaneously getting rich.
To recap the scenario for those who haven’t seen it lately: Murphy and Ackroyd get ahold of a secret “crop report” that says that orange crops have not been affected by recent frosts. They pass on a fake report to Bellamy and Ameche (presumably saying the opposite). Bellamy and Ameche send their trader into the pits and tell him to buy orange futures, no matter what happens (he does). Murphy and Ackroyd also buy futures. Then the report is issued and Murphy and Ackroyd begin selling. Then Bellamy and Ameche tell their trader to sell, but it’s too late or something.
It just seems to me that Ackroyd and Murphy would have lost money rather than getting rich. They may have ruined Ameche and Bellamy, but how could they make money buying futures and then selling them again? Don’t Ameche and Bellamy still have lots of futures that are worth something? Can someone who understood the scenario better than I please elaborate?
Well, my guess would be that a good crop report would mean that the price of orange juice would fall. So Murphy and Ackroyd are selling their futures at the top of their value. The others were assuming that a bad crop report would lead the price of orange juice to go up, rather than down.
Your confusion lies in the fact that Billy Ray and Louis (the Eddie Murphy and Dan Ackroyd characters) were not buying, right at the beginning. They were selling. Speifically, they were selling short - that is, selling delivery contracts they didn’t own. As the Duke’s frantic buying drove the prices higher and higher, and more people began to believe that the Dukes knew something, and buy themselves, Billy Ray and Louis sold more and more futures.
Then the Secretary of Agriculture’s real report came out. Immediately it became clear that, since the orange crop was unaffected by the frost, the price of frozen concentrated orange juice would remain low - there would be ample supply on the market, and all the futures bought by the Dukes (and others) were priced far too high. So everyone immediately began an orgy of selling, and the price fell dramatically. When the price had fallen sufficiently low, Louis and Billy Ray began buying, to accumulate the contracts to satisfy their earlier short sell. In other words, they now began buying the orange juice that they had already sold.
If the price had continued to rise, of course, they would have lost money. If they sold FCOJ at $50, and by the time the day ended, they could only buy it at $75, they’d lose $25. But if they sold it at $50, and then bought it later at $10, obviously they’d do well.
Akroyd/Murphy sold for $1.42 (their first trade) and bought for $0.29 (their last trade). When you sell something for more than you pay for it, you make a profit. What’s hard to understand is how they can sell first and buy later. They borrowed “FCOJ” and sold it at the opening. When they repurchased later in the day, they replenished the FCOJ they had borrowed.
The Dukes were buying at prices abover $1.00 and selling at prices below $0.50 (in that order). Hence, they lost money.
Actually there is a significant difference between selling short (as it is known in stock trading) and trading in futures. When you sell stock short you are essentially borrowing stock from your broker, selling it today, and promising to replace the stock at a later date (or pay the broker the then-current value of the stock at that later date).
If you don’t own the stock you are shorting, it is known as an uncovered short. You are essentially betting that the stock price will go down. If it goes down, you can buy the stock back in the market at the now-lower price, repay your broker and keep the profits. If it goes up, however, you may have a problem. If the price goes up, you will have to buy the now-more expensive stock to repay the broker. If the price goes up enough, your broker may decide (or the SEC rules may force him to decide) that he’s extended you too much credit, and may ask you to put more money or securities in your brokerage account. If you cannot, the broker may sell other securities in you account to get the money to clear the short.
If you already own the stock that you are short selling, it is known as a covered short. There may be times when you want to sell stock you own, but have reasons (often tax) that you cannot actually sell the stock in the market. In this case, if you sell the stock short, at any time you can sell the stock you own at the then-current market price, and repay your broker for the short stock you borrowed at the same price. You will have essentially locked in the market price at the day you sold short, and subsequent price changes will not affect you.
Commodity futures are a little different. With futures, you promise to buy or sell the physical commodity at at a specific date for a specific price (For example, Frozen Concentrated Orange Juice for December 1 delivery at $100). Everyone in the market is either promising to buy or sell on the delivery date at the specified price. Unless you actually produce FCOJ, or use FCOJ in your business, you are trading speculatively. Unless you match the number of contracts you’ve sold and the number you’ve bought by the delivery date, you will have to pony up the OJ (or buy it) at that date (though actually you’ll probably be able to buy or sell the OJ on the spot market if you cannot deliver or use the physicals, though the spot market price can vary significantly). Needless to say, commodity future trading is very risky (and is subject to the same sort of margin calls as short selling of stock).
Now what Ackroyd/Murphy did was initially sell contracts for delivery at a later date. That is to say, they promised that by the delivery date they would get enough OJ by the delivery date to cover their contracts, either by obtaining the physical OJ, or by buying offsetting contracts in the market. When everybody thought there would be little OJ supply, the price of this promise to sell and deliver was very high. When everybody found out there would be ample supply, the price of this promise to deliver dropped significantly. After the price dropped, they bought back offsetting contracts for delivery (or looked at another way, they got a promise that they could buy the same amount of OJ at the delivery date that they had earlier promsed to sell). Having equalized their position, they could leave the market with the money they made.
Now when you’re in the market with more promises to sell than promises to buy, you’re known as having a short position, and if you have more promises to buy, you’re known as having a long position. In some ways this is similar to having a short position in stock or long position in stock (actually owning the stock), but the key difference is that there is an actual delivery date called for.
I consider that when you see a film you have to broad your mind (unless it is based on real facts). This film is a variation of Mark Twains´s "The Million Dollar Note. A similar picture, but with the aforementioned name is dated 1953 and the principal character is Gregory Peck. For this 1953 film even a special and faked “Million Pound Note” was issued.
I would like to hear your comments about my note.
Regards,
Félix Sancassano