of short-term trading is vastly greater than that of nature. It is greater even after the pit-scalping trade, as a class distinct from the speculator, is left out of the Certain statistical characteristics of future trading affor tunity for the development of these points are dealt with IV and V. FINANCIAL RESOURCES OF SPECULATORS.-The prevailin theory of speculation supposes that the speculator has th financial resources to back his commitments in the face of of market opinion and notwithstanding unforeseen de until his opinion is changed, and that his conviction is n of emotion, though subject to change for good reasons. In fact, margins are small and reliance is placed on ab out quickly in the case of an adverse turn of the market upon ability to support commitments by any necessary fu gin deposits. The natural tendency is to extend the volu ing so that available funds for margining are spread Moreover, speculative traders in general, but especially, of outsider and the small dabbler in futures, are likely to b and emotional in their judgments and panicky. DEGREE OF COMPETENCE OF SPECULATORS.-The prevalin theory of speculation supposes knowledge of conditions and demand such as to constitute a tolerable foundation fo ing the probable course of future events that may determ prices. In fact, while possibly a majority, even of the small s pay some attention to statistics pertinent to the grain appear to form an independent opinion of their own. M small speculators probably have little qualifying knowled ence, or skill. Many of them are too anxious to trade, an the market at random. ADJUSTMENT OF SUPPLY AND DEMAND. The prevailing theory of speculation supposes that it tends to adjust pres and demand with reference to future needs. Speculation, under ordinary conditions, probably works than most of the processes of economic competition. B institution of grain futures, where special provision is ma speculation often works badly, and sometimes the machine down. Apart from the special relation of futures to corne lation, as was abundantly proved in the World War, and similar emergencies, does not always work well if left to works least well just when both the need of price regulatio volume of speculation are greatest. There is as yet no sa standard of measurement to which to refer in considering speculation in fact works sufficiently smoothly and efficient forming the function ascribed to it. The subject of speculation in connection with the study futures can not be set apart and treated by itself. Spec essential to the institution and permeates all its operati present chapter, therefore, deals with the subject only in general aspects. The comparison. iling economic the necessary of fluctuations developments s not a matter ability to get et rather than · further mar olume of trad d rather thin. of course, the o be imitative ing economic ns of supply for forecast"mine market speculators, n trade, few Most of the edge, experi and get into ng economic esent supply ks no worse But in the made for it. nery breaks ners, specund in other > itself and on and the satisfactory ng whether atly in per y of grain culation is tion. The its more THE HEDGING OF BETS.-Without implying that the hedge bet and the grain hedge in futures have much resemblance in use and purpose, a comparison of the mechanics of the two processes is worth noting in the explanation of the hedging use of futures. It is not an accident that the same word is used in these two very different applications. In ordinary betting parlance the gambler "hedges" when he bets on the opposite side from his previous bet, thus standing to win and to lose both at the same time, and in such a way that, if possible, the winnings will exceed the losses. If the odds have changed before the gambler hedges his first bet, sure winnings are often possible, provided all the bets are paid. He may thus hedge to insure a small gain or even to prevent a large loss on a previous wager. For example, he may bet a week before the event $800 to $1,000 that the reds will win from the blues. If in three days the odds change, he may hedge by betting $900 to $1,000 on the blues and figure on a net gain of $200 if the blues win and $100 if the reds win. If the betting on both sides stays even, there is neither gain nor loss on a hedge. The hedging of bets always involves two transactions having opposite relations to an event, or betting on both sides of an issue, or cross betting. GRAIN HEDGES.-Hedging in grain-trade practice may be defined as a combination of transactions in cash grain and in futures such that a purchase of the former is accompanied by a sale of the latter in corresponding quantity and vice versa. Hedging ordinarily involves fourfold transactions-an initial purchase and an initial sale, one of the cash grain and the other of the futures, and the opposite closing transactions in each. By means of hedging, a loss on the cash grain will presumably be offset by a gain on the futures and vice versa. Although the hedge is best treated for purposes of definition as a matter of two transactions offsetting each other, functionally it is a matter of opposite responsibilities balancing each other. Against the ownership of the grain is a liability on the future sale in the form of an open trade. The two-e. g., grain owned and open sales of futures or flour contracts and open purchases of futures-will ordinarily be made to offset by coincident purchases and sales. But the identity of the grain owned may change. The grain in the bins may be sold and the bins refilled with the old hedge continuing to serve for the new grain. Such procedure may involve a departure from coincidence in time and quantity between the contrary responsibilities, which, if slight, is not important. merely wheat but also wheat products, the prices of whic dependent on the price of wheat. In this case the fu chased when the flour is sold, and later sold when the g the flour contract is obtained. In hedging by millers chases are somewhat more usual than initial sales. Mi usually have some storage capacity of their own, and buy wheat ahead of its flour contracts, perhaps because th variety of wheat it wants is to be secured to advantage purchases of cars as they come from the country, in wh hedging will be effected by sales of futures. Exporter even merchandising elevators, may contract to supply of their accumulation of it, and then they buy instea futures as a hedge. Elevator hedging, however, is genera by sales of futures against purchases of actual grain. If the hedging is "close"-for example, if the quantit sold as hedges is kept in close conformity with the quan grain purchased-and if the only trades made in futures the net quantity of futures sold for which the trades any time equals the quantity of grain on hand, or bou not yet sold. In order that the purpose of protection be pletely performed, the paired transactions must be co time. But the simultaneous purchase and sale of cash under the strictest hedging policy, make a future unnecessary. The significance of the net open as a measure of t of grain or of flour contracts held under hedge sugges as to the meaning of the "gross open" under such circ that is, of open trades in different options or markets th bought commitments in which are set against each oth of against grain owned or flour contracted to be sold. extent this condition may be due to the greater suitabil time being of a particular market or option for placing than a sold hedge or vice versa. But when the volume open on both bought and sold sides, though in different markets, is large, spreading operations may be infer known that large elevators, especially those of the North mingle a good deal of spreading with their hedging The practical measure of such spreading is the quantit future trades both bought and sold, the one side in one option and the other in another. The future end of the trades involved in hedging is ferred to as the "hedge," and the first future transact cribed as "putting on a hedge." The closing of the fu is called "closing out a hedge." When the grain hedged b sale is itself sold, the hedge is removed (the future is boug else the future trade becomes a speculation. RELATION OF HEDGING TO DELIVERY ON FUTURES.-Hedgin does not involve an expectation to deliver the grain on t contract, though the hedger of purchased grain is presu better position to make delivery than the mere speculator livery on hedges does at times occur. e future is pur ne grain to meet lers initial pur Mills, however and a mill may e the particula ge only by such which case the rters, also, and ly grain ahead tead of selling erally initiated tity of futures antity of cash res are hedges es are open at ought, that is be most comcoincident in h grain may e transaction the quantity པ སས་Vས ས〉ཨཟ with as complete safety at Chicago when it was not regularly deliverable on Chicago future contracts as grades that were deliverable. In general, elevators place their hedges in their own near-by terminal market (by later shifting, if not in the first instance), so that, if occasion arises, they can make delivery there. It is only under special market conditions, however, that they want to make delivery on futures, since in that case they get no benefit of any special qualities their grain may have. Of course, their attitude is somewhat affected by whether they have mixing and conditioning facilities. The merchandiser with such facilities may bring below-grade grain up to the contract grade and dispose of it to advantage through delivery on his future sales; but he may also similarly improve the grade of deliverable grain and sell it at more than parity with the future price. As one grain man puts it, in general elevators do not want to "lose their cash grain" through delivery. Delivery facilities are in effect an additional safeguard to the hedger, and this is offered as a reason for the maintenance of public elevators, not directly profitable, by certain large Chicago grain merchandisers. The hedging elevator is under no pressure to get out of the futures market before the latter part of the delivery month, because the time when delivery shall be made is at its (the seller's) option. A corner can not so seriously affect its situation as it does that of the short seller, provided, of course, the elevator is hedging grain in position for delivery and of deliverable grade. The theory of hedging does not involve actual delivery, and in practice the per cent of deliveries is small. Hedges are placed for the purpose of offsetting losses from fluctuations in the price of grain between the time of purchase and sale. If the cash grain is not sold before the future contract matures the hedge is usually transferred to a more remote future. Hedging may be done where it would be impossible or impracticable, because of the location of the grain or because of its quality, to deliver on the future contract the actual grain hedged. gests a query rcumstances; the sold and other instead d. To some ility for the ng a bought e of futures t options or rred. It is hwest, often operations. ity of open e market or usually retion is deuture trade by a future ght in), or ng as such the future umably in r, and de vice versa. HEDGING ONE GRAIN IN ANOTHER.-One kind of grain may be hedged in another on the basis of equivalent value. Thus barley may be hedged in oats, rye in wheat, and durum in spring wheat. The use of oats futures as a hedge for barley constitutes the most important class of such hedging. Rye was formerly hedged in wheat, but the present rye futures markets appear to serve hedging needs fairly well. Wheat futures have been used to "hedge" oats and Cotton bags have been known to be hedged in cotton futures. In fact, the extent to which so-called hedging might thus be broadened is unlimited. By this broadening process, however, the operation takes on the characteristics of spreading rather than hedging. If such a hedger is not to become chiefly a speculator, it is necessary that the variations in the price of the future used be closely parallel with those of the commodity hedged. It would not do to hedge coal in wheat. Some dealers say that hedging in another grain should be let alone, as the risk involved makes it speculative. number of pounds of oats to be fairly constant.1 Bu hedge a stock of barley in oats futures may be influence that Chicago barley futures are not adequate to the hedgers. It is also possible, however, that an elevator hedges may be actuated by spreading rather than by p ing motives and purposes. If the owner of barley wa go to a high price before placing a hedge in the latter, is something more than a hedge. Something similar the stated policy of one elevator to buy barley only cheaper than oats and to mix it with oats. It is doubtful whether it is entirely safe to sell a f price reflects the value of grain of deliverable grade against sample grade or no-grade grain. The price of grain in relation to the price of deliverable grades fluct But some dealers regularly hedge sample grades. The a dryer contributes to safety in hedging low-grade or n The hedging of bin-burnt corn, it is alleged, is also prac Section 2. Hedging as the justification of future trading. r HEDGING IN RELATION TO SCALE OF OPERATIONS. use of the futures market is always put forward to m the system of future trading as the justification of the in fact as a sufficient excuse for a large amount, or any speculation-whatever may be necessary to provide a hedging market. Without the hedging opportunities speculation, it is undoubtedly true that grain could n bought and sold in large quantities except by concerns o having large capital, because the risks involved would of the dealers' capacity to carry them. It is noteworthy t ment contracts for large quantities of supplies for the much to do with the development of future trading provisions during the Civil War. Modern business ger upon the subdivision of risks in large undertakings and doing this in relation to individual transactions is no completely afforded than by certain commodity futures. Hedging for transactions on a smaller scale, such as risk within the limits of ordinary mercantile enterpris interesting uses and advantages. Risk is to be measured tion to the financial resources of the risk taker rather the of absolute magnitude. An unhedged contract for 5,000 flour might occasion bankruptcy to a small miller. By the hedging facilities afforded by futures markets it be sible for a man with sufficient experience to start into business on much smaller capital than would otherwise b Such independent small grain dealers are especially for country districts. At the terminals, also, it may be that markets have checked integration and kept competition a 1 An examination of the spread between cash barley and barley future hand, and cash barley and oats futures (pound for pound) on the other, from this point of view, though the data are not considered worth reprodu Spreads at Chicago were computed for the calendar years 1919 and 192 future spread for barley in this period shows no very high degree of regular greater than that of the barley-oats spread. Evidently the choice of oats hedge for barley implies that the futures market in barley is very narrow factory to get in and out of. |