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ging has three outstanding purposes. He may hedge: 1. To eliminate the probability of speculative profit or loss, due to market fluctuations. 2. To protect a profit on a favorable purchase of actual sugar. 3. To establish and limit a loss on an unfavorable purchase of actual sugar. HEDGING _to protect a normal jobbing profit by eliminating the probability of a speculative loss or gain_. This operation is particularly useful to jobbers with whom conditions are such that they desire to be assured that their cost will be at about the market price at the time they dispose of their sugar, regardless of whether the market be higher or lower. Although there are times when any jobber, no matter where located, will find this a useful transaction, it is obvious that many buyers will not wish to use the market in this way unless they feel it will decline. But it is particularly of advantage to a jobber located in markets necessitating a delay of from one day to several weeks in transit. For instance, on a certain day in April, two jobbers bought their usual quantity of sugar. One was located in Syracuse, the other in New York. Two days following the purchase, the market broke half a cent per pound. In view of the fact that his sugars were still in transit when the market declined, the Syracuse buyer was obliged to sustain this entire loss, in order to meet competition. On the other hand, because he received and distributed the sugar before the market broke, the New York jobber was able not only to avoid a loss, but make his regular profit. CHART 1 ---------------------------------------------------------------------------- HEDGING to protect a normal jobbing profit by eliminating the probability of a speculative loss or gain ------------+-----------------------------------------+-----------+--------- Initial | | Transactions| Subsequent Transactions | Result ------------+-----------+---------------+-----+-------+-----------+--------- |Liquidating| Condition |Price| Result| Figure | In each | the hedge | of market | you | of | your | case |(covering) | when you |would| hedge | sugar | the | | "cover" | pay | cost | cost | same | | your hedge | in | this | this |
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