As the word itself indicates, a "hedge" on the Exchange is a
protection.
You hedge by buying or owning actual sugar, and "selling short" in the
same amount. You sell sugar futures although you do not own any. You
actually contract to deliver an amount of sugar during a specified
future month at a specified price.
Eventually, you must either buy and deliver actual sugar to carry out
this contract, or you must buy another contract for futures to cancel
your short sale. This is known as a "covering" operation, and the
cancelling of one by the other takes place automatically through the
channels of the Exchange.
From the jobber's point of view, the operation of hedging has three
outstanding purposes. He may hedge:
1. To eliminate the probability of speculative profit or loss, due
to market fluctuations.