Suppose that a cattle feeder placed 200 head of feeder cattle in April 2020 and planned to sell the fed cattle in August. Expected fed cattle weight is 1200 lbs. per animal. On 25 Apr 2020, the cash price of fed cattle was 144.00 cents/lb., and the price of Dec 2020 CME Live Cattle futures was 141.78 cents/lb. (see page 2 of the spread sheet). The cattle feeder was worried that cash price of fed cattle might Fall in August and hedged using Put options on Dec 2020 CME Live Cattle futures. The feeder placed hedge on April 25 and, on August 20, lifted the hedge and sold the fed animals in the cash market.

Consider two short hedging strategies – (1) full hedging with a Put option (with SP = 160 cent/lb.) on of Dec 2020 CME Live Cattle futures; and (2) delta hedging with the same Put option (with SP = 160 cent/lb.) on Dec 2020 CME Live Cattle futures.

1. If the cattle feeder hedged her full cash position, how many put option contracts did she use? 

Answer: NFC^F =

2. Using the following table, calculate the cattle feeder’s net realized price per pound of fed cattle from full hedging. Use the April 25 and August 20 cash prices, futures prices, and option premiums as listed on the second page of the spread sheet. Fill the gaps, calculate cash revenue, gain/loss from hedging, and net realized price. 

Date/Action	Cash Market	Futures Market
Apr 25, 2020 Action	CP = _______ cents/lb.	Dec. 20 CME LC, FP = ________ c/lb.
	None	Long/Short ____ Put with SP = 160 c/lb.at Pf = _____ cents/lb.
Aug 20, 2020 Action	CP = _______ cents/lb.	FP = ____________ cents/lb.
	________ 200 fed animals @ ___________________	Exercise/Do not Exercise (delete one)
		Gain / Loss = _______________ c/lb.
Revenue from selling cattle =		Total Gain/Loss =
Net proceeds = Cash revenue + Gains from hedging		=
Net realized price (cents/lb.)		=

3. If the cattle feeder used delta hedging based on the average delta hedge ratio (that you calculated in question 6), how many put option contracts did she use?

Answer: NFC^δ=

4. Using the following table, calculate the cattle feeder’s net realized price per pound of fed cattle from delta hedging. Use the April 25 and August 20 cash prices, futures prices, and option premiums as listed on the second page of the spread sheet. Fill the gaps, calculate revenue, gain/loss, and net realized price. (8 Points)

Date/Action	Cash Market	Futures Market
Apr 25, 2020 Action	CP = _______ cents/lb.	Dec. 20 CME LC, FP = ________ c/lb.
	None	δ = ______; HRδ = ____; NFCδ = _____ Long/Short ____ Put with SP = 160 c/lb.at Pf = _____ cents/lb.
Aug 20, 2020 Action	CP = _______ cents/lb.	FP = ____________ cents/lb.
	________ 200 fed animals @ ___________________	Exercise/Do not Exercise (delete one)
		Gain / Loss = _______________ c/lb.
Revenue from selling cattle =		Total Gain/Loss =
Net proceeds = Cash revenue + Gains from hedging		=
Net realized price (cents/lb.)		=

Answer rating: 100% (QA)

Full Hedging Number of Put Option Contracts Used Number of head of feeder cattle 200 Each contract r... View the full answer