150 WHEAT PRODUCTION IN NEW ZEALAND 



future delivery would be possible without the speculative 

 market. This could happen to some extent, but without 

 the speculative market there would be no continuous 

 market in which a definite price for future deliveries is 

 always quoted. 



But the use of the continuous market is not, however, 

 the only safeguard which the trader or merchant has 

 against risk. By extending the system he has devised 

 a second method, which consists of almost complete 

 insurance against loss by "hedging" transactions. The 

 practice consists in carrying two lines of compensating 

 transactions, on the part of the merchant or manufac- 

 turer, one in the speculative market and one outside. 

 These contracts are always of opposite nature, and thus 

 act as a "hedge" against all price fluctuations. Thus 

 for example, the dealer who buys wheat in the interior 

 may sell immediately an equivalent amount for future 

 delivery on some exchange, not meaning to deliver the 

 wheat he has just sold. When "he does sell his actual 

 holdings he may fulfil his exchange contract by covering 

 in open market. The object of the exchange contract is, 

 of course, to avoid risk. If the price falls, the dealer's 

 wheat is worth less to him, but this loss will be made 

 good by the profit on his exchange transactions where 

 he sold short on a falling market. In the same way he 

 sacrifices all chances of great profit."* 



This method of insurance by "hedging" is common in 

 the United States of America, among most large millers, 

 dealers, and elevator companies. So common has the 

 practice become that one who does not "hedge" is looked 

 upon as most reckless, and, paradoxical as it may seem, 

 the man who strictly avoids the speculative market is 

 the greatest speculator of all. 



*See also "Report of the British Association, " 1900. 

 "Report of Committee on Future Dealings on Raw Produce 

 Exchanges.' 7 Page 426. 



