COTTON PRICES AND MARKETS 27 
for two purposes primarily — as a guide in arriving at spot-cotton 
prices, or as a price-making instrument; and as a hedge, or a price- 
insurance instrument. 
The futures market is used for insurance purposes primarily by 
merchants and manufacturers, and to some extent by growers. The 
insurance is not obtained in the form of a policy, but in a double 
transaction known as a " hedge." A hedge is a sale or purchase of 
a contract for future delivery against a previous purchase or sale 
of an equal quantity of the same commodity or an equivalent quan- 
tity of another commodity that has a parallel price movement, and 
where it is expected that the transaction in the contract market will 
be canceled by an offset transaction at the time the contemplated 
spot transaction is completed and before the future contract matures. 
Thus the dealer who buys 100 bales of cotton from a merchant and 
immediately sells them to a spinner is not hedging in the ordinary 
sense. Neither is the merchant in Norfolk hedging when he buys 
100 bales of cotton and sells a future contract against it with the 
purpose of making immediate delivery. These are merely purchases 
and resales. The merchant who buys cotton hedges when he sells 
contracts for future delivery against his purchases which he expects 
to buy back when he sells the cotton. The spinners or others who 
make similar offset transactions are hedging. A perfect hedge is one 
where the loss or gain on the first transactions is equal to the gain 
or loss on the opposite or hedge transaction. 
Suppose the spinner who has no orders but wishes to keep his mill 
running has an attractive offer of a desirable lot of cotton. He 
buys the spot cotton to spin at, say 20 cents per pound, and at the 
same time sells futures to the quantity of cotton bought at 20 cents. 
Six weeks afterward when he has the cloth finished he has an oppor- 
tunity to sell it on the basis of the prevailing price of cotton, say 
15 cents, and make his customary mill margin. When he makes 
the sale of the cloth he must at the same time buy back his futures. 
The spinner has evidently lost 5 cents a pound on his spot cotton, 
but he can buy back his futures at 5 cents a pound less ; so he makes 
as much on his futures, or hedge transaction, as he loses on his spots, 
and his mill margin is undisturbed. 
In normal times the bulk of the dry-goods business is done on 
cotton bought for foward shipment. Spring goods are often sold in 
August for January and February shipment. The cotton to cover 
such a sale is also bought for forward shipment and timed to meet the 
manufacturer's requirements. If an order of goods requires 500 
bales, the spinner may ask that shipments be made in 100-bale lots 
every 15 days beginning September 1, to continue until the entire 
order is filled. If he covers such an order by hedging, he bases his 
offer on the price of futures for the hedge month and buys the re- 
quired number of contracts to cover his sales. His cotton account 
Avould show somewhat as follows : 
August 1, 1923, sold goods* for January-February shipment requiring 500 
bales Middling %-inch cotton. 
August 1, bought five New York December contracts at 23.30 cents as a hedge. 
September 1, bought 500 bales of M. %-inch cotton f. o. b. mill at 26.30 
cents. 
September 1, sold five December contracts at 25.60 cents. 
