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Suppose you are a beef producer and know that you will require 240,000 pounds of live cattle on April 15. You decide to use May futures contracts on live cattle to hedge your risk. You calculated that the standard deviation of monthly changes in the spot price of live cattle is 1.4, and the standard deviation of monthly changes in the futures price of live cattle for the closest contract is 1.5. The correlation between the futures price changes and the spot price changes is 0.85. Each contract is for the delivery of 40,000 pounds of cattle. What strategy should you follow?

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Financial Management, Finance

Category:- Financial Management
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