D-Miller Corporation is the primary producer of beef and the main supplier to many restaurants. Live cattle are reared, slaughtered and cuts of beef delivered to restaurant businesses. Faced with a business environment subject to many disruptions, the Board of D-Miller Corporation met and heard submissions from the Chief Financial Officer who proposed the use of Futures contracts to keep D-Miller competitive amidst disruptions. The Chief Financial Officer, in consultation with the operations manager, identified the need for 150,000 pounds of live cattle to meet beef delivery demand in November 2023. The CFO proposed hedging the position with Futures contracts. The Board members asked for additional information and analysis to support the CFO’s proposal. 

1. Calculate the optimal number of contracts required for hedging and prepare appropriate Margin Account, using data from www.cmegroup.com to reflect the CFO’s proposal for hedging with Futures, initiated on Friday, 25-Aug-2023 when the futures settlement price is 181.175 and thereafter trading five (5) days to September 1 (Initial margin = 1.25x Maintenance Margin) 

2. Explain the hedge strategies and any drawback to hedging the risk using Futures contract

Answer rating: 100% (QA)

1 To calculate the optimal number of contracts required for hedging and prepare the appropriate Margin Account we need the following information Live cattle contract size This is the quantity of live ... View the full answer