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About sugar buying for jobbers by B. W. Dyer

Will be about 2c above the market price


On

the other hand, the reverse might be the case. You might find the market going down, and say, "The market is going lower. I want to hedge against that, and limit my loss to a definite amount."

CHART 2

---------------------------------------------------------------------------- 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 2c a pound, and he hedges, he maintains his profit of 2c 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.

In the same way, conversely, if he has a loss on his sugar of 2c a pound, by hedging he can limit that loss to 2c a pound, even though the market goes still lower. In other words, his sugar cost at the time of delivery, or at the time when he expects to sell the sugar, will be about 2c above the market price, whether the market is higher or lower.


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