time of delivery). This is 2.00 under
the market and you have accomplished your purpose.
HEDGING _to establish and limit a loss on an unfavorable purchase_.
This operation is identical in its working with the previous example,
except that you have a different end in view.
CHART 3
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HEDGING
to establish and limit a loss on an unfavorable purchase
------------+--------+---------------+-------+----------+----------+-------
Initial | |
Transactions| Subsequent Transactions | Result
------------+--------+---------------+-------+----------+----------+-------
| Hedge | Condition of | Price | Result | Figure | In
| | market when | you | of | actual | each
| | you "cover" | pay | hedge | sugar | case
| | your hedge | for | and | cost | the
| | |futures| covering | this | same
| | | to | operation| way |
| | | cover | | |
| | | hedge | | |
------------+--------+---------------+-------+----------+----------+-------
You buy | | | | |Price paid|
actual sugar| | | | |for actual|
at 6.00 but | | | | |sugar less|
before you | | | | |hedging |
have | |It has declined| | A profit |profit |
received it | |to 4.00 | 4.00 | of 1.00 |6-1=5.00 |
(or before | | | | | |
you sell it)| | | | | |
the price | | | | | |
declines to | | | | | |
5.00 | | | | | |
| | | | | |
You now have| | | | |Price paid|Your
your sugar | | | | |for actual|sugar
at 1.00 | | | | |sugar plus|cost is
above the |You sell|
|