The standard deviation of monthly changes in the spot price of live cattle is 1.4 (in US cents

per pound - in this instance one pound is a unit of mass equal to about 0,454 kilograms).

The standard deviation of monthly changes in the futures price of live cattle for the closest

contract is 1.9. The correlation between the futures price changes and the spot price

changes is 0.9.

On 15 October a beef producer makes a commitment to purchase 140 000 pounds of live

cattle later that year, on 15 November. 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. Determine the appropriate strategy for the beef producer to follow.