On the other hand, when it becomes necessary for you to cover your hedge, if the market has remained steady and is again at 8.00, the two futures transactions cancel themselves without profit or loss. Your original cost of 6.00, therefore, stands as your actual sugar cost at the time of selling (or at the time of delivery). This is 2.00 under the market and you have accomplished your purpose. HEDGING _to establish and limit a loss on an unfavorable purchase_. This operation is identical in its working with the previous example, except that you have a different end in view. CHART 3 -------------------------------------------------------------------------- HEDGING to establish and limit a loss on an unfavorable purchase ------------+--------+---------------+-------+----------+----------+------- Initial | | Transactions| Subsequent Transactions | Result ------------+--------+---------------+-------+----------+----------+------- | Hedge | Condition of | Price | Result | Figure | In | | market when | you | of | actual | each | | you "cover" | pay | hedge | sugar | case | | your hedge | for | and | cost | the | | |futures| covering | this | same | | | to | operation| way | | | | cover | | | | | | hedge | | | ------------+--------+---------------+-------+----------+----------+------- You buy | | | | |Price paid| actual sugar| | | | |for actual| at 6.00 but | | | | |sugar less| before you | | | | |hedging | have | |It has declined| | A profit |profit | received it | |to 4.00 | 4.00 | of 1.00 |6-1=5.00 | (or before | | | | | | you sell it)| | | | | | the price | | | | | | declines to | | | | | | 5.00 | | | | | | | | | | | | You now have| | | | |Price paid|Your your sugar | | | | |for actual|sugar at 1.00 | | | | |sugar plus|cost is above the |You sell| | | |hedging |1.00 market |futures |It has advanced| |A loss of |loss |above |at 5.00 |to 6.00 | 6.00 |1.00 |6+1=7.00 |the