---------------------------------------------------------------------------- HEDGING to protect a normal jobbing profit by eliminating the probability of a speculative loss or gain ------------+-----------------------------------------+-----------+--------- Initial | | Transactions| Subsequent Transactions | Result ------------+-----------+---------------+-----+-------+-----------+--------- |Liquidating| Condition |Price| Result| Figure | In each | the hedge | of market | you | of | your | case |(covering) | when you |would| hedge | sugar | the | | "cover" | pay | cost | cost | same | | your hedge | in | this | this | | | |cover| way | way | | | |-ing | | | ------------+-----------+---------------+-----+-------+-----------+--------- You buy | When you | | |Profit |Actual cost| actual sugar| sell your |It has declined| | |less profit| at 6.00 | sugar (or |to 4.00 |4.00 |2.00 |6-2=4 | | when it is| | | | | | delivered)| | | | | | you buy | | | | |You get | the same | | | | |your | amount of | | | | |sugar | futures at| | | | |at the | the market| | | | |market | price, | | | | |price | whether | | | | |at the | higher or | | | | |time | lower. | | | | |when you | | | | | |sell it | | | | | |(or when At the same | | | | |Actual cost|your time you | |It has advanced| |Loss |plus loss |delivery hedge by | |to 8.00 |8.00 |2.00 |6+2=8 |is made.) selling the | | | | | | same amount | | | |No | | of futures | |It stands at | |profit,|Actual | at 6.00 | |6.00 |6.00 |no loss|cost | ------------+-----------+---------------+-----+-------+-----------+---------