COTTOX PRICES AND MARKETS 29 
The merchant who sells to the mill for forward delivery at a 
fixed price must in turn buy futures as a hedge if he does not have 
spot cotton to cover the order. If he does have the spots, they are 
usually hedged by a sale of contracts, and the contracts are bought 
back at time of forward sale. If he should cover his sale for for- 
ward delivery by immediately buying the spots, a thing not often 
done, he would be " covering " but not hedging in the strict sense of 
the term. The merchant who has a good outlet for cotton, and who 
has a large force to assemble cotton, may supply manufacturers their 
needs by selling for forward delivery and in turn protect himself 
by a purchase of futures, which he sells as he buys the spot cotton 
to cover the order. 
Thus, if in the above illustration the spinner had bought 500 bales 
of Middling %-inch cotton on description from the merchant at 
24.15 cents for forward delivery, the transaction would have been 
handled about as follows: The price would have been quoted as 85 
points on December, which was then selling at 23.30, the price to be 
fixed by the spinner immediately. The merchant figures 50 points as 
cost of delivering the cotton to the mill and 35 points as his margin 
for doing business. The merchant does not have the cotton, so he 
buys five December contracts and holds them until he buys the spot 
cotton. Suppose he buys 100 bales August 25 at 24.30 cents, f . o. b. 
shipping point, and it costs him 50 additional points to deliver to 
the mill, and he sells one December contract at 24.40. 
His account for the 100 bales would close out with the following 
results : 
Futures Spots 
(cents) (cents; 
Price of even-running cotton f. o. b. mill 24. 30 
Cost of hedge Aug. 1 23.30 
Price of even-running cotton f. o. b. shipping point 24. 15 
Price of December contracts Aug. 25 24.40 
Profit on contracts 1. 10 
Loss on spots .15 
Points 
Gross profit on contracts 95 
Cost of delivery to mill 50 
Net margin for doing business 45 
The cotton grower may use the future market by selling contracts 
against his anticipated crop and thus fix his price. On June 24, 
1924, December contracts were selling, say 25 cents. If the farmer 
expected to grow 100 bales and wished to hedge or fix his price, he 
could have sold one contract in New York or Xew Orleans. When 
the cotton was picked he could either hold it until December and 
deliver it on contract through his broker or sell the spot cotton in 
the regular way and immediately buy back his December contract. 
Xot a large amount of this type of business is done at present. The 
farmer ordinarily needs in making the crop the money that would 
be required for margins and the risks of crop failure are too great 
for individuals to go it alone. 
The exchanges provide a continuous and liquid market. This 
characteristic is largely the result of giving professional risk takers, 
speculators, and the public the most convenient means for trading in 
