Question
The standard deviation of monthly changes in the spot price of live cattle is 3.6 cents per pound. The standard deviation of monthly changes in
The standard deviation of monthly changes in the spot price of live cattle is 3.6 cents per pound. The standard deviation of monthly changes in the futures price of live cattle for the closest contract is 4.0 cents per pound. The correlation between the monthly futures price changes and the monthly spot price changes is 0.9. It is now October 8th. A beef producer is committed to purchasing 1,000,000 pounds of live cattle in one month. The producer wants to use the December live-cattle futures contracts to hedge its risk. Each contract is for the delivery of 40,000 pounds of cattle.
(a) The minimum-variance hedge ratio is __________.
(b) The beef producer can take a ( long , short ) position in ________ December futures contracts. (*Choose the correct word, and fill in the blank with the correct number.)
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