|you |If it has | |loss | |for actual |
price and |sell |declined | |of | |sugar plus |
take orders |your |to | | | |hedging loss|
on the basis |fu- |4.00 | 4.00 |2.00 | 4.00 |4+2=6 |
of 6c sugar |tures | | | | | |
| |If it is | |No | | |
| |still at | |profit,| | |
| |6.00 | 6.00 |no loss| 6.00 | 6.00 |
-------------+------+----------+--------+-------+------+------------+-------
It is equally clear that if a manufacturer names a price and takes
advance orders without pre-determining his sugar cost, his profit is a
matter of guesswork. He is not going to know the cost of his
manufactured product until he buys his sugar.
Assume that you have contracted to deliver sugar to a manufacturer or
to any customer at a definite date and a specified price, without
buying sugar to cover your requirements. If the price of sugar is
favorable when you deliver it, you are fortunate and net a profit. But
sugar may have advanced to a point where you are forced to pay such a
price that your profit is lower than it should be. In fact there may
not be any profit at all.
By conservative, wise use of the Sugar Exchange, most of this risk and
uncertainty can be eliminated and both you and your customer can go
ahead with your plans with your prices determined through a known sugar
cost.
Suppose that in March or April, for example, the market appears strong
and you find that some of your manufacturing customers are anxious to
be assured of an adequate supply of sugar at a definite price. In such
a case, if these advance orders called for a sufficient volume, and
provided Exchange prices were favorable, you could take care of your
trade's future requirements at a fixed price, without yourself taking a
speculative position. We also believe that buyers making these
arrangements with any of their trade would be justified in requesting
the same proportionate marginal protection which it is necessary for
jobbers themselves to give the seller on the Exchange. There will no
doubt be many occasions when it would be worth while to solicit orders
on this basis.
With your own sugar cost fixed by the use of the Exchange, you could
take proper care of these buyers without worrying about subsequent
fluctuatio
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