Hedging in Practice $($Future Markets$)$

$1.$ Complete a T$-$account in the table below for a feedlot that places feeder cattle on feed in September. Use the information in Table $8\mathrm{.}1($or the CME Group$$s website$)$ to determine the appropriate futures contract expiration month for this feedlot. Also use the T$-$accounts in Figure $8\mathrm{.}6$ as a guide.

$$ Beginning of the planning period $($September$)$: The appropriate futures contract is trading at $$130\mathrm{.}00$ per cwt when the cattle are placed in September.

$$ End of the planning period $($January$)$: The cattle are finished and ready to be sold. The spot price the cattle will receive is $$120\mathrm{.}00$ per cwt$.$ The appropriate futures contract is trading at $$118\mathrm{.}00$ per cwt$.$

Spot $($Cash$)$ Market Futures Market

September $($place cattle on feed$)$ Futures contract at $$130\mathrm{.}00$ per cwt

A

B

January $($live cattle finished$)$ Sell live cattle to packer at $$120\mathrm{.}00$ per cwt Futures contract at $$118\mathrm{.}00$ per cwt

C

D

a$.$ For A: Define the appropriate position the feedlot needs to take in the futures market in August. $(?)$

b$.$ For B: Define the appropriate futures contract expiration month the feedlot should use when initiating their hedge in September. $(?)$

c$.$ For C: Define the appropriate position the feedlot needs to take in the futures market in December to offset their futures position. $(?)$

d$.$ For D: Define the appropriate futures contract expiration month the feedlot should use when offsetting their hedge in December. $(?)$

e$.$ Calculate the feedlot$$s per unit net price $($$ per cwt$)$ considering both the spot and futures transactions. Show your work.

Net Price $=$ Spot Market Price $+$ Futures Profits $=?$

$2.$ Now assume that when the cattle are placed on feed at the beginning of the planning period, the feedlot expects to finish $120,000$ lb of live cattle for the January spot market $($this would be approximately $90$ head of cattle$).$

a$.$ Based on the size of the live cattle futures contract, once again using the information in Table $8\mathrm{.}1$ or the CME Group$$s website, how many live cattle futures contracts should the feedlot use to hedge two$-$thirds of their planned spot market quantity?

Hedge Quantity $=?$

Live Cattle Futures Contract Size $=?$

Total Number of Contracts $=$ Hedge Quantity $/$ Contract Size $=?$

b$.$ In January, the feedlot sold $110,000$ lb of finished live cattle to the packer $($at a price of $$120\mathrm{.}00$ per cwt$).$ Calculate their net revenue $($total dollars$)$ based on the combined outcomes of both the spot market and futures market $($using the same futures market prices shown in the T$-$account diagram$).$

Net Revenue $=$ Total Cash Revenue $+$ Total Futures Profits $=?$

c$.$ Calculate the net price $($$ per cwt$)$ the feedlot received based on the hedged quantity of two$-$thirds of the feedlot$$s expected January quantity where you should divide the net revenue from the previous question by the total pounds sold in the cash market.

Net Price $=$ Net Revenue $/$ Spot Market Quantity $=?$