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_]

It is probably more common for the cotton merchant to hedge than for the
manufacturer to adopt that proceeding. The manufacturer, as a rule, has
been accustomed to buy his cotton duri