The cotton merchant, in making a hedge, would proceed in this fashion. Having made an actual sale of cotton to a spinner for future delivery, the price being fixed according to current quotations in New York for deliveries to be made in the month specified in the contract, he would buy futures for a corresponding amount of cotton on the New York Cotton Exchange. If the price of cotton should have advanced when the time for the delivery of the actual cotton comes, he will be able to sell his futures contract at a higher price, thus offsetting the loss sustained upon the deal in actual cotton. Or, if he prefers, he may hold the "futures" contract until its maturity and sell it at the then prevailing figure. The first course would be the customary one for a bona-fide merchant, whose sole concern is protecting himself against loss by fluctuations in price. If, on the other hand, cotton should fall before the merchant bought to fulfill his actual contract, he would make a profit upon his sales to the spinner. He would, however, suffer a loss upon his futures contract, for the seller would be able to purchase the cotton to fulfill the contract at a lower point than the contract called for, and would consequently be able to deliver to the merchant who made the hedge, cotton which the latter would be forced to accept at a price higher than the then prevailing one, and thus again the profit and loss would balance each other. The usual custom is, not for the merchant to accept delivery, but to pay over to the seller of the futures contract the difference between the contract price and that prevailing. This would be just the difference between his own purchasing and selling price in his actual dealing with the spinner, and so would eliminate the profit, due to change in price, made in that transaction. Thus, by the hedging process, the merchant loses a possible profit on a falling market, but at the same time fails to suffer a loss when the market is against him. Hedging as Practiced By Cotton Manufacturers The manufacturer's hedging is necessarily somewhat different in practice, though the same in principle. If he accepts orders for cloth requiring more cotton than is being held in his warehouse, he may buy futures contracts to the amount of the additional cotton he will need. Then in the event that his actual purchase of cotton may be at a figure which would tend to reduce or eliminate his profits on the sale of the cloth, already fixed by contract, he may sell his futures contract at a corresponding profit, thereby preventing loss. Should the price of cotton fall in the interim, his profit on the sale of the cloth will be larger, but the settlement of his futures contract will be expensive to the same extent. Thus he sacrifices the chance of a greater possible profit in order to be insured against loss. [Illustration: _Compress bales bound for New Orleans_]