5. Hedging with Futures You are working for a company that processes beef and will take delivery of 720,000 pounds of cattle in August. You would like to lock in your costs today because you are concerned about an increase in cattle prices. Go to the CME Group at cmegroup.com and find the contract size for live cattle. How many futures contracts will you need to hedge your exposure?

Will you go long or short on these contracts? Now find the most recent price quote for live cattle futures on the CME Group website. What price are you effectively locking in if you traded at the last price? Suppose cattle prices increase 5 percent before the expiration. What is your profit or loss on the futures position? What if the price decreases by 5 percent? Explain how your futures position has eliminated your exposure to price risk in the live cattle market.