Part I: Cattle Hedge

A cattleman wants to hedge against possible low cattle prices to ensure an adequate profit margin. He plans to sell the cattle to the slaughterhouse in May. The cattleman's price objective is $$1\mathrm{.}25/$lb$,$ and he plans to sell $40,000$ pounds of product. On January $20$th he opens a position on the futures market using June Live Cattle contracts $($size $40,000$ lbs$),$ that trade for $$1\mathrm{.}21/$lb$.$

What type of position should the cattleman open in the futures market? Is this a long or a short hedge? How would you calculate the actual selling$/$buying price for this hedge? $(4$ points$)$

On May $20$th$,$ when the product is sold, the cattleman offsets his futures position at $$1\mathrm{.}15/$lb$.$ The $($local$)$ cash price is $$0\mathrm{.}05$ above futures. Use a T$-$account to calculate the gains $($losses$)$ in both the cash and futures markets, the total profit$/$loss$,$ the differences in the basis, and the actual selling price on May $20$th$.(10$ points$)$

Instead, assume that the cattleman$$s production was $44,000$ pounds of product and that he used the same position as above to hedge his price risk. What would his hedge ratio be$?$ What would the expected selling price be$?$ Why? $(6$ points$)$