---------------------------------------------------------------------------- HEDGING to protect a gain on a favorable purchase of actual sugar --------------+-----------------------------------------+----------+-------- Initial | | Transactions | Subsequent Transactions | Result --------------+--------+----------+---------+-----------+----------+-------- | Hedge |Condition |Price you| Result of | Figure | In | |of market | pay for | hedge and | actual | each | | when you | futures | covering | sugar | case | | "cover" | to cover| operation | cost | the | |your hedge| hedge | | this way | same --------------+--------+----------+---------+-----------+----------+--------- You buy actual| | | | |Price paid| sugar at 6.00,| | | | |for actual| but before you| |It has | | |sugar less|Your have received | |declined | | |hedging |sugar it (or before | |to | |A profit |profit |cost you sell it) | |6.00 | 6.00 |of 2.00 |6-2=4.00 |is the price | | | | | |2.00 advances to | | | | | |under 8.00 | | | | |Price paid|the | | | | |for actual|market You now have |You sell|It has | | |sugar plus| your sugar at |futures |advanced | | |hedging | 2.00 under the|at |to | |A loss |loss | market |8.00 |10.00 | 10.00 |of 2.00 |6+2=8.00 | | | | | | | You feel that | |It stands | |No profit, | | the market may| |at 8.00 | 8.00 |no loss | 6.00 | recede and | | | | | | eliminate | | | | | | this gain, | | | | | | so-- | | | | | | --------------+--------+----------+---------+-----------+----------+-------- In both of these cases, the operation is relative. If a man has a profit, let us say 2¢ a pound, and he hedges, he maintains his profit of 2¢ a pound as compared with the market at the time of delivery, or at the time when he expects to sell this sugar, regardless of whether the market is higher or lower.