| | | | | |market You feel | |It stands at | |No profit,| | that the | |5.00 | 5.00 |no loss | 6.00 | market may | | | | | | decline | | | | | | still | | | | | | further and | | | | | | increase | | | | | | this loss, | | | | | | so-- | | | | | | ------------+--------+---------------+-------+----------+----------+------- Let us say that you purchase actual sugar at 6.00. If the market declines to 5.00 after your original purchase at 6.00, you have a _loss_ of 1.00, in the value of your sugar. Facing the possibility of a further decline and desiring to _limit_ this loss to 1.00, you hedge by selling futures. In this case you should limit your _loss_ to 1.00 just as effectively as in the previous example you preserved your _gain_ of 2.00, and by the same course of procedure. (See Chart 3.) By the time it is necessary for you to cover your hedge by buying an equivalent amount of futures, the market may have declined still further, say to 4.00. You sold at 5.00, you bought at 4.00, profit on that operation, 1.00. Subtract this profit from your original cost (6.00) and figure your sugar cost at 5.00. In other words, although the market went still lower, you succeeded in limiting your loss to 1.00, as compared with the market price at the time of the delivery of your sugar (or at the time you sell it). Had you omitted the hedge, your actual sugar cost would have been 6.00, which was 2.00 above the market. After your original purchase at 6.00, and market decline to 5.00 (at which point you hedged), the market might advance again to 6.00, or remain steady at 5.00, but the operation is no different from that previously described, and you in each case attain the same result. Buying of Sugar Futures Refiners do not make a practice of taking orders more than thirty days in advance of actual delivery--but there are obviously times when it is advisable to cover one's requirements for a longer period. A jobber may do this on the Exchange where he will always find a seller at _some_ price for the quantity he desires. This privilege is particularly valuable to: 1. Jobbers who believe that the market price of Sugar is going higher and who desire to cover their future requirements beyond the delay period which refiners will extend. 2. Jobbers, who desire to sell to manufacturing customers for future delivery at a fixed price so that these manufacturing customers may determine their selling price, may do so by the use of the Exchange.