The standard deviation of monthly changes in the spot price oflive cattle is (in cents per pound) 1.

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The standard deviation of monthly changes in the spot price oflive cattle is (in cents per pound) 1.3. The standard deviation ofmonthly changes in the futures price of live cattle for the closestcontract is 1.4. The correlation between the futures price changesand the spot price changes is 0.81. It is now February 15. A beefproducer is committed to purchasing 200,000 pounds of live cattleon July 15. The producer plans to use the August live-cattlefutures contracts to hedge its price risk. Each contract is for thedelivery of 40,000 pounds of cattle. a. Should the producer take a long or short position in thefutures contracts? b. Using a minimum variance hedge ratio, how many contracts areneeded? (Round to nearest full contract.) . . .

 
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