I just watched “Trading Places”, circa 1983 staring Dan Aykroyd and Eddie Murphy. I understand that Valentine and Winthorp sold high and bought low, but I’m not entirely clear on how they could sell futures they didn’t yet have purchased already. Unless of course the plan was to buy contracts when the market dips.
I guess the way I think about it, it’s fraudulent to sell someone contracts for something you don’t already have secured, just seems odd. So I started wondering if I simply don’t know how futures trading works.
Concise_Pirate: No, it’s not fraudulent as long as you have good reason to believe you can secure the items when needed.
staticjacket: So what if someone reneges on their contract to sell? The buyer simply takes them to court for damages?
Maybe that’s the crux of the question I’m trying to ask.
savebythebell: Let me try this again. Earlier I put a link to a NPR audio talked about this very subject, but I didn’t put anything else, and as most of you know it is against the rules.
It comes down to the same explanations the links that Concise_Pirate gave.
That you buy contracts at a set price for April. They could be $1.50, but as the market makes its way to April: The good weather, more crops could be on the ground, and more supply is in the marked, then those prices could go down to $1.25 and a loss happens.
The audio explains this a lot better with jazzy music and audio clips of the movie. Enloy!