1.The standard deviation of monthly changes in the spot price of live cattle is (in cents per pound) 1.2. The standard deviation of monthly changes in the futures price of live cattle for the closest contract is 1.4. The correlation between the futures price changes and the spot price changes is 0.7. It is now October 15. A beef producer iscommitted to purchasing 200,000 pounds in 2 months of live-cattle futures contracts to hedge its risk. Each contract is for the delivery of 40,000 pounds of cattle. What strategy should the beef producer follow?

2. On July 1, an investor holds50,000 shares of a certain stock. The market price is $30 per share. The investor is interested in hedging against movements in the market over the next month and decides to use the September Mini S&P 500 futures contract. The index futures price is 1,500and one contract is for delivery of $50 times the index. The beta of the stock is 1.3. What strategy should the investor follow?

3. The expected return on the S&P 500 is 12% and the risk-free rate is 5%. What is the expected return on the investment with a beta of (a) 0.2, (b) 0.5, and (c) 1.4?

4. It is now June. A company knows that it will sell 5,000 barrels of crude oil in September.It uses the October CME Group futures contract to hedge the price it will receive. Each contract is on 1,000 barrels of light sweet crude. What position should it take? What price risks is it still exposed to after taking the position?

5. A trader owns 55,000 units of a particular asset and decides to hedge the value of herposition with futures contracts on another related asset. Each futures contract is on 5,000units. The spot price of the asset that is owned is $28 and the standard deviation of thechange in this price over the life of the hedge is estimated to be $0.43. The futures price ofthe related asset is $27 and the standard deviation of the change in this over the life of thehedge is $0.40. The coefficient of correlation between the spot price change and futuresprice change is 0.95.

(a) What is the minimum variance hedge ratio?(

b) Should the hedger take a long or short futures position?

(c) What is the optimal number of futures contracts when issues associated with daily settlement are not considered?

(d) How can the daily settlement of futures contractsbe taken into account?