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EXAMPLE 1:
Assume that you are a cattle rancher. You believe that you can
make an acceptable return to your efforts as long as the price of
cattle is at or above1!".## per c$t% an& hence this is your
marketing price ob'ective. You e(pect to have !## cattle )1*#%###
lbs+ to sell by ,ctober 1st. -o$ever% youare $orrie& that cash
prices might fall bet$een no$ an& $hen the cattle are rea&y
for market. You $ant to he&ge your price risk $ith
futurescontracts. )ote: /c$t0 is the abbreviation for
/hun&re&$eight0% a unit of measure e2ualing 1## lbs+
,n March !3th% you are e(pecting cash prices in early ,ctober to
be about 1!#.## per c$t )$hich is the average price over the past "
years+. ,nMarch !3thyou &eci&e to he&ge your entire
pro&uction in ,ctober live cattle futures $hen the ,ctober
futures contract )4#%### lbs per contract+ istra&ing at 1!5.##
per c$t.
,n ,ctober 1st% your cattle are rea&y for sale% an& your
local cash price is 1!*.## per c$t an& the actual basis is
1.##.
)1+ ,n March !3% $hat is the e(pecte& cash price for cattle
to be sol&6 7777777777 )4 pts+
)!+ -o$ many futures contracts $ill you nee& to he&ge
all of your cattle6 77777 )4 pts+
)5+ 8o he&ge% $hat position $ill you take in the futures
market on March !36 7777777777 )4 pts+
)4+ 9hat position $ill you take on ,ct 1 to offset your original
futures market position6 777777 )4 pts+
)"+ 9hat position $ill you have in the cash market on ,ct 16
7777777777 )4 pts+
)*+ 9hat is the e(pecte& basis on March !36 7777777777 )4
pts+
)3+ i& the basis narro$;strengthen or $i&en;$eaken6 )4
pts+
)+ -ave you met your original sales price ob'ective )$hy or $hy
not+6 )4 pts+
)1#+ 9oul& you have been better or $orse off if you ha&
been active only in the cash market )$hy or $hy not+6 )4 pts+
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EXAMPLE !
Assume that you are a rice farmer. You believe that you can make
an acceptable return to your efforts as long as the price of rice
is at or above13.*" per c$t% an& hence this is your marketing
price ob'ective. You e(pect to harvest 1"#%### c$t of rice by
Ganuary "th. -o$ever% you are $orrie&that cash prices might
fall bet$een no$ an& harvest. You $ant to he&ge your price
risk $ith futures contracts. )ote: /c$t0 is the abbreviation
for/hun&re&$eight0% a unit of measure e2ualing 1## lbs%
unless you are in Englan& an& then a hun&re&$eight
e2uals 11! lbsH+
,n ,ct 15th% you are e(pecting cash prices in late Gan to be
about 1*."# per c$t )$hich is the average price over the past "
years+. ,n ,ct 15 thyou&eci&e to he&ge your entire
pro&uction in Gan rice futures $hen the May futures contract
)!%### c$t per contract+ $hen the e(pecte& basis is at .1
