The Variance of Monthly Changes in the Spot Price of Live

question 3

Multiple Choice

The variance of monthly changes in the spot price of live cattle is (in cents per pound) is 1.7.The variance of monthly changes in the futures price of live cattle for the April contract is 1.5.The correlation between these two price changes is 0.75.Today is March 11.The beef producer is committed to purchasing 400,000 pounds of live cattle on April 15.The producer wants to use the April cattle futures contract to hedge its risk.How many contracts should the producer buy,if the contract size is 40,000 pounds?

• A) 5
• B) 7
• C) 8
• D) 11
• E) None of these answers are correct.

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Hawthorne Studies

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