Use the Exchange when the Market is Favorably out of line

In considering the illustrative examples in this booklet, it should be
borne in mind that the measure of protection afforded is relative and
not absolute. The theory of exchange operations is that the exchange
market will move relatively the same as the market for the actual
commodity.

This cannot be strictly true, although the exchange market must of
necessity follow very closely the actual market, because all the sugar
must, in the final analysis, come from the actual market. If thrown out
of parity with the actual market, the exchange market is bound to come
back eventually.

In the exchange market anyone can buy and anyone can sell. The market
is subject to many outside influences, and the fluctuations reflect and
accentuate the varying shades of market opinions of many individuals.
But in the market for the actual commodity, the quotations are made by
comparatively few men, which means that there will be less fluctuation.

Therefore, it is obvious that although the exchange market _should_ be
on a parity with the actual market, the unequal fluctuations of the two
markets will be constantly throwing them out of parity or "out of
line."

There are times when the market will be so out of line that the _buying_
of futures should result profitably. At other times, with conditions
reversed, _selling_ of futures seems obviously advisable. We do not
claim that jobbers can protect sugar purchases with absolute and exact
precision. On the basis of long exchange experience, we _do_ believe,
however, that by a discreet use of the Exchange, and by using the
market when quotations are _favorably_ out of line, jobbers can do so
to their decided advantage.

Selling of Futures--Hedging

As the word itself indicates, a "hedge" on the Exchange is a
protection.

You hedge by buying or owning actual sugar, and "selling short" in the
same amount. You sell sugar futures although you do not own any. You
actually contract to deliver an amount of sugar during a specified
future month at a specified price.

Eventually, you must either buy and deliver actual sugar to carry out
this contract, or you must buy another contract for futures to cancel
your short sale. This is known as a "covering" operation, and the
cancelling of one by the other takes place automatically through the
channels of the Exchange.

From the jobber's point of view, the operation of hed