Suppose that a cattle feeder placed 200 head of feeder cattle in April 2020 and planned to sell the fed cattle in August. Expected fed cattle weight is 1200 lbs. per animal. On 25 Apr 2020, the cash price of fed cattle was 144.00 cents/lb., and the price of Dec 2020 CME Live Cattle futures was 141.78 cents/lb. (see page 2 of the spread sheet). The cattle feeder was worried that cash price of fed cattle might Fall in August and hedged using Put options on Dec 2020 CME Live Cattle futures. The feeder placed hedge on April 25 and, on August 20, lifted the hedge and sold the fed animals in the cash market.

Consider two short hedging strategies - (1) full hedging with a Put option (with SP = 160 cent/lb.) on of Dec 2020 CME Live Cattle futures; and (2) delta hedging with the same Put option (with SP = 160 cent/lb.) on Dec 2020 CME Live Cattle futures.

A.If the cattle feeder hedged her full cash position, how many put option contracts did she use? (4 Points)

Answer: NFC^F =

Average delta= -0.87 Hedge Ratio= 1.34