Assume its December and a feeder cattle producer has agreed to provide 240,000 pounds of feeder cattle at the current market price in 3 months time (late March). Currently, the market price is $1.25/lb and the producer feels a good profit can be attained at that price given their management style. However, the producer knows they can manage price risk by hedging feeder cattle contracts against a possible cash market decline. Assume the producer wants 100% price coverage. Currently available feeder cattle futures contracts and prices (prices are in dollars/lb): January $1.30 March $1.32 April $1.35 May $1.37 Question 1. Which contract month and price would you select from the above list to begin the hedge? In late March, prior to delivery, feeder cattle prices fell 10% to $1.13/lb on the local cash market and since we are nearing delivery the futures price for an __________ contract has also nearly converged to the cash market levels with a price of $1.17/lb. Question 2. Which month fills in the blank of the above sentence? Question 3. For this livestock producer, the hedge is considered a short hedge (True or False). Question 4. Assuming the producer closes the hedge and adds any gains/losses from the futures market, what is the final price received for the producer?

Date Cash Futures Basis December $1.25/lb 1.35/lb (Long or Short?) $-0.10 Late March $1.13/lb 1.17/lb (Long or Short?) $-0.04 Net Price Received ________ __________ ______

Sales Proceeds Planned: 240,000 Lbs * Planned Price in December ($1.25) = $300,000 With Hedging: 240,000 Lbs * Net Price at the end of the Hedge ($________ ) = $___________ Without Hedging: 240,000 Lbs * Late March Cash Price ($1.13) = $271,200