But…
You don’t have any rice, and you think the price of rice is going to go down. How do you make a profit from that?
Suppose there is a friend or a lender who has an existing inventory of rice (and therefore currently long). His rice is just sitting there while he waits for the price to go up.
You borrow 1 kg of rice from him, at 0 percent interest for this example (since you are great friends, you trust each other, and all that) and enter a contract to return 1 kg of rice to them at a future date.
You take the borrowed rice and sell it in the market at the current market price of 10 dollars. You are now short of the rice you borrowed, should they ask you for it.
When the price of rice goes down to 9 dollars, you buy back 1 kg of rice at the market price of 9 dollars and return it to your friend or lender. Leaving 1 dollar remaining with you — your profit.
If the price of rice went up to 11 dollars while you were short of it, and the lender asked for it to be returned, you would have to buy it at the 11 dollars price. The 1 dollar paid from your pocket is your loss.
