ns of the market, as you would know that your sugar cost
would be about the price paid for your futures which, let us say, is
6.00. (See Chart 4.)
The market may advance so that by September, sugar is selling at 8.00.
(You are now making deliveries to your trade as contracted). So you
sell your futures at 8.00, go into the market and buy actual sugar for
about the same figure, assuming, of course, that actual sugar has also
advanced in relative proportion, which is likely. You pay 2.00 more for
your actual sugar than you had figured but you have profited to the
extent of 2.00 on the sale of futures. Profit and loss cancel each
other and you have your sugar at 6.00. In other words, although the
market is now 8.00 you are delivering 6.00 sugar to your customers,
with a profit to yourself.
If the market declines after your original purchase at 6.00 so that in
September sugar is selling at 4.00, you will sell your futures at 4.00,
taking a loss of 2.00. But you will buy your actual sugar at about
4.00, also, which is 2.00 lower than you planned for. This gain of
2.00, while not to be termed an actual profit, may certainly be
considered as canceling the loss on the sale of your futures, so that
the cost of your sugar is really 6.00, your original price.
Another way of looking at this is to add the loss of 2.00 on the sale
of your futures to 4.00, the cost of your actual sugar, making 6.00,
the price upon which you had based your plans. If you had waited, you
would have been able to get your sugar for 4.00, but by buying it ahead
you have had the benefits of protection and the elimination of
speculation and risk.
If the market remains steady after your June purchase, or after various
fluctuations, returns to 6.00 by September, you sell your futures at
6.00 and buy spot sugar for about the same amount. Thus you have
neither gained nor lost, but you have been protected in your sugar
cost.
This is essentially a "playing-safe" operation. It results in profit
insurance for the jobber who is willing to sacrifice the possibility of
a speculative gain on advance sales to customers. It is thoroughly
sound business policy and is neither expensive nor difficult to carry
out.
Point of Delivery
Although Chicago is the delivery point in all Exchange contracts for
refined sugar, it should be plainly understood that the Exchange is for
anyone, anywhere. Whether located in Chicago, or in Rochester,
Baltimore, New York
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