28 BULLETIN 1444, U. S. DEPARTMENT OF AGRICULTURE 
Price of even- 
running spots 
Futures f . o. b, mill 
(cents) (cents) 
Prices Aug. 1, 1923 23. 30 24. 15 
Prices Sept. 1 25.60 26.30 
Gain on futures 2.30 
Loss on spots 2.15 
Net gain on the double transaction, 15 points, or 75 cents a bale, from which 
must be deducted commissions for buying and selling futures. 
The spinner may cover the above contract in other ways: (1) He 
may buy the spot cotton August 1 for immediate delivery. Ordi- 
narily he does not ; because, (a) it ties up his capital for too long a 
period, or (b) it takes him too long to make the selection, or (c) he 
does not know where that quantity of cotton of the desired quality 
can be had immediately, or (d) he does not have warehouse space to 
accommodate the cotton, or (e) he fears that the order for goods 
might be canceled, thus leaving the spot cotton to finance or sell, 
which requires more attention and moves less readily than contracts 
lor future delivery. (2) He may buy the specific grade on descrip- 
tion from a merchant at 24.15 for forward delivery, to be shipped as 
may be agreed upon by the contracting parties. In this type of 
transaction the responsibility of hedging and the risks of changes in 
basis fall upon the merchant. Much busiriess is being done in this 
way. (3) The spinner may buy from a merchant by fixing the 
difference between the price of contracts and the price of spots, f. o. b. 
a named point, and do his own hedging. Thus in the above case 
the price would be 85 points on December. In this instance it is desir- 
able to fix the price immediately. If the spinner does his own hedg- 
ing, he buys five December contracts. If the cotton merchant is to 
do the hedging, on the spinner's call the latter calls immediately, 
and the merchant buys the December contracts. This type of busi- 
ness is little used to cover sales of goods already made. It is used a 
great deal where spinners have not sold goods forward, but Avish 
to accumulate a desirable lot of cotton in anticipation of orders. 
This is only one way that the spinner may use the hedge. 
The merchant obtains his protection against general price changes 
in much the same way as the spinner. It enables him to buy cotton 
without having made a previous sale, and to sell for forward delivery 
spot cotton which he does not have but which, in the normal course 
of events, he will have. On August 15 October futures may be 
quoted at 22 cents. The merchant through his local agent has an 
opportunity to buy 100 bales of cotton from farmers. He calcu- 
lates the freight and other costs of delivering cotton and finds they 
equal 175 points. He figures he must have 25 points as a margin 
for doing business. The local buyer is given a limit of a flat price 
of 20 cents, or else of 200 points " off " the future. The merchant 
now sells one future contract, or 100 bales, as a hedge against the 
100 bales bought in the local market. If the price of cotton goes 
down he loses on his spots, but gains an equal amount on his futures, 
which leaves his "merchant's profit" undisturbed. In practice, 
transactions are not so simple, nor is protection so perfect as given 
in the above illustration. 
