top of page
Journal: Blog2
  • Dr. Andy Schell, Ph.D., DBA, CPA, CMB

Hedging Explained: by Trading Places

In the 1983 movie Trading Places, Louis Winthrope (Aykroyd) and Billy Ray Valentine (Murphy) attempt to “get rich quick” while at the same time putting the bad guys in the “poor house” through a series of commodity trades.

The bad guys try to capture insider information about the Orange crop report. They hope to launch a commodity trade to profit from insider information.

Louis and Billy Ray (good guys) intercepted the crop report and exchanged it with false information saying there is a shortage of Oranges. The good guys know there is no shortage of Oranges.

When the market opens on the day the crop report is announced on TV, the bad guys launch a massive buying spree to profit from Orange Juice commodity activity as a commodity trading scheme. Their buying activity causes the price to climb as many brokers speculate on the trade and keep buying more.

Knowing the false crop report will cause the bad guys to buy as much as possible, Winthrop waits until the price climbs to $130 per contract and then starts selling.

The new report appears and says the Orange Crop is fine - there is no shortage. This new information about the Orange harvest triggers a massive selling effort, which causes prices to fall. Winthrop waits for the price to fall and then starts buying at $30 a contract.

The good guys sold contracts at $130 and bought at $30: A profit of $100 per contract.

The bad guys bought contracts at $130 and sold at $30: A loss of $100 per contract.

The key point is, selling before buying is a “short” position. A short position may result in a trading gain based on the difference between the selling price and the buying price.

Both the good guys and the bad guys were speculating in the commodity market.

In real life, Orange grove farmers use commodities to lock-in a sale price as they plant their crops. When the crops are harvested, they sell the Orange crop at the market and use the commodity contact to preserve the expected gain.

In the same way, Mortgage lenders sell commodity contracts in mortgages to lock-in the gain on the loans in process. The mortgage commodity is called a To Be Announced (TBA) Mortgage Back Security (MBS). Mortgage lenders sell TBA-MBS to preserve their pipeline risk until the Mortgages are harvested (closed) and available to be sold in the market. This is hedging. It is not speculating because Lenders own the crop of mortgages they will sell in the future.

And, this is how Louis and Billy Ray from Trading Places explain hedging….

MBS Financial Services supports the following areas:

  • Growth Strategy – We can help you plan and execute a growth strategy.

  • Hedging & Pipeline Risk Management - Dr. Schell can help explain how hedging functions, the benefits of hedging, and the risks associated with the activity. See blog posts.

  • Technology must align with a firm's strategic objective. Every mortgage lender's technology infrastructure significantly impacts its customer experience and employee workflow. MBS will help select, configure and deploy the best technology solution.

  • Executive Development - Leadership is a learned skill. Dr. Schell can teach you to be an amazing leader, an effective manager, and an inspiring coach that can foster a vibrant culture.

  • Accounting Services – Dr. Schell, CPA, leads the accounting services team to become your outsourced accounting department. This alternative makes more and more sense for companies wishing to focus on their core business and also want trustworthy accounting and financial reporting support.

About Dr. Schell:

Dr. Andy Schell, Ph.D., DBA, MSML, MBA, CPA/CFF, CMB

Dr. Schell is CEO, Managing Partner, and Co-Founder of Mortgage Banking Solutions and the Founder of MBS Financial Services ("MBS"), based in Austin, Texas. Dr. Schell is known for his ability to turn "vision into reality" and "chaos into order" as he finds creative solutions to the challenges his clients face addressing Revenue Stability, Technology Enhancement, Financial Management, and Workflow Efficiency.

He has 4 decades of experience as a strategist directing the activity of both small and large groups of employees including mortgage lending activity at Bank of America. His leadership knowledge extends from his hands-on experience and his academic training in his MBA, his master's degree in leadership, and his doctoral work to examine employee dynamics given leader stimulus.

To find out more information on MBS Services, please click HERE

Find more information at ; (512) 501-2812;

Doctor Schell the Profit Doctor

Recent Posts

See All

10 Steps to Launch Hedging

Best Efforts and TBA-MBS short protect IRLC Historically, TBA-MBS increases gain by 30bp to 60bp depending on market and product When rates go up, the value of the pipeline and warehouse goes down. Th

CEO's Guide to Hedging

Understanding the Blackbox of Margin Preservation When rates go up, the value of the pipeline and warehouse goes down. The reason there is a decline in value is that the future cash flow is discounted


bottom of page