The CME is the world's largest futures trading center for non storable commodities, one of which is live cattle futures. In November, a cattle 12 producer buys feeder cattle with the intent to feed them for future sale in April. To cover all production costs and guarantee a profit, the producer will need to sell the cattle at $65/cwt. The current April live cattle futures price is $70/cwt. and the basis is $3.00.

a) Set up a short hedge position for this cattle producer and analyze it assuming that the futures price at the beginning of April, when the contract is bought back is at $65 and the basis has narrowed by $1.0. b) Repeat (a) and compute the realized price in April if the futures price in April is $72 and the basis has remained unchanged.