The farmer can short 3 contracts that have 3 months to maturity. If the price of cattle falls, the

gain on the futures contract will offset the loss on the sale of the cattle. If the price of cattle rises,

the gain on the sale of the cattle will be offset by the loss on the futures contract. Using futures

contracts to hedge has the advantage that it can at no cost reduce risk to almost zero. Its

disadvantage is that the farmer no longer gains from favorable movements in cattle prices.