The Birmingham age-herald., 1908-05-04
Parity Disturbed.

Parity DiSturpeo
 Such disturbances in the normal parity between the spot middling price and the contract price therefore increase the rlsNs attending future operations Any increase of risk which can be prevented is clearly an evil. Abnormal disturbances of the narity between the two prices increase the difficulty of forecasting the course of the price of future contracts. Oper- ators in futures base their transactions in the main upon study or condltiohs of the spot market. Under proper ana normal difference system they can as sume that conditions which tend to ad- vance or depress the price of mlddilng cotton in the spot market will likewise tend to advance or depress the price or hasis mjddling future contracts. AS matter of fact most operators, as a result of failure to understand thoroughly the influence of grade differences, do maze. that assumption even when, because ol improper differences, there is really no such parity, Where such parity does Hot exist. conditions affecting the value or midding in the spot market become prac- ticallv worthless as a guide to the opef- ator in rutureh, since the prices become denendent on artificial rather than on nat ural conditions A few operators Of un- ,sual resources and cieverness may nnd nrofit in such abnormal disturDances III this parity between spot mlddllng anu contract prices; but it is apparent that tne rank and file of operators VIII ma their transactions much more hazafdous Ill case the two prices do not move III sup stantial harmony An absolutely con- stant margin between the two prices can not he hoped for, since, as already stated, inc future market fiuctuates more lre- ouently and often more violently than tne snot market; but under proper Work- ing of the future system such dlsturp- ances should not continue for any con- siderable period of time. ,,
 The injury resulting from a disturb ance of the normal parity is perhaps best illustrated in the case of hedging
 transactions Hedging is legitimate and me of the most important functions or fnture trading Whereas vast amount of business in futures is unquest1onapiy of a highly speculative character, the hedging function is primarily intended to reduce the element of speculation III transactions in spot cotton. Hedging, Tn other words, is a sort of insurance against ,oss tbe theory being that by means of bedees the merchant can calculate with onnroximate certainty on fixed margin of profit. foregoing hopes of extraordinary ,ra;rs for the sake of protection against extraordinary losses.
 Tba nrotection afforded the cotton mer- chant by hedging may best be illus trated by a concrete example, Let 1t be assumed that a cotton merchant in the south has contracted in the late summer months, when the old crop or cotton IS ar. oticaJlv exhausted and before the new aror has been gathered, to deliver 1O,O0u tales of middling cotton to spinner in Fall River, Mass, in the following Janu- arv al A fixed price. Since at the time this contract is made he does not have the 10000 bales of middling cotton on hand and has no means of immediately secur- ing if. obviously he may suffer a heaVy loss if. before he can purchase this cotton the price advances sharply, as It may easily do owing to any one of a number