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Determine the appropriate strategy

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Question - The standard deviation of monthly changes in the spot price of live cattle is 1.4 (in US cents per pound - in this instance one pound is a unit of mass equal to about 0,454 kilograms).

The standard deviation of monthly changes in the futures price of live cattle for the closest contract is 1.9. The correlation between the futures price changes and the spot price changes is 0.9.

On 15 October a beef producer makes a commitment to purchase 140 000 pounds of live cattle later that year, on 15 November. The producer wants to use the December live-cattle futures contracts to hedge its risk. Each contract is for the delivery of 40 000 pounds of cattle. Determine the appropriate strategy for the beef producer to follow.

Reference no: EM133030875

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