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 above
$125.00 per cwt, and hence this is your marketing price objective. You expect to have 200 cattle (160,000 lbs) to sell by October 1st. However, you
are worried that cash prices might fall between now and when the cattle are ready for market. You want to hedge your price risk with futures
contracts. (Note: cwt is the abbreviation for hundred-weight, a unit of measure equaling 100 lbs)
On March 27th, you are expecting cash prices in early October to be about $120.00 per cwt (which is the average price over the past 5 years). On
March 27th you decide to hedge your entire production in October live cattle futures when the October futures contract (40,000 lbs per contract) is
trading at $123.00 per cwt.
On October 1st, your cattle are ready for sale, and your local cash price is $126.00 per cwt and the actual basis is -$1.00.
(1)

On March 27, what is the expected cash price for cattle to be sold? __________ (4 pts)

(2)

How many futures contracts will you need to hedge all of your cattle? _____ (4 pts)

(3)

To hedge, what position will you take in the futures market on March 27? __________ (4 pts)

(4)

What position will you take on Oct 1 to offset your original futures market position? ______ (4 pts)

(5)

What position will you have in the cash market on Oct 1? __________ (4 pts)

(6)

What is the expected basis on March 27? __________ (4 pts)

(7)

Did the basis narrow/strengthen or widen/weaken? (4 pts)

(8)

What was your realized sales price per cwt of rice? (4 pts)

(9)

Have you met your original sales price objective (why or why not)? (4 pts)

(10)

Would you have been better or worse off if you had been active only in the cash market (why or why not)? (4 pts)

A Double-T Account
Date
Mar
27th

Cash Market
Mkt Price Objective = $ _____cwt
Expected Cash Price = $__

Oct
1st

Futures Market
Long or Short
Position Taken? ______

/cwt Price? $___

Expected Basis = _____

Number of Contracts ___

Mkt. Position is
Long or short?

Contract Maturity date

/cwt

___

___

Price in the cash market = $

___/cwt

Offsetting Position Taken?

___
Actual Basis = _____ ___/cwt

Price? $

___/cwt

___

Price difference over time in cash

market (expected vs. actual): Up or
down and by how much?
$
___/cwt
Oct
1st

/cwt

Expected Yield = __________

Mkt. Position is

Basis

Result: Gain or loss ? Loss

How much? $ ___

Cash Price =
Futures Gain or Loss =
Realized Price =

Change in Basis?
Strengthened or Weakened?
Change in Basis?
Narrowed or Widened?

/cwt

$ _______
$ _______
$ _______

Marketing Objective Met? Yes or

No? Why?

EXAMPLE 2
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 above
$17.65 per cwt, and hence this is your marketing price objective. You expect to harvest 150,000 cwt of rice by January 5th. However, you are worried
that cash prices might fall between now and harvest. You want to hedge your price risk with futures contracts. (Note: cwt is the abbreviation for
hundred-weight, a unit of measure equaling 100 lbs, unless you are in England and then a hundred-weight equals 112 lbs)
On Oct 13th, you are expecting cash prices in late Jan to be about $16.50 per cwt (which is the average price over the past 5 years). On Oct 13th you
decide to hedge your entire production in Jan rice futures when the May futures contract (2,000 cwt per contract) when the expected basis is at -$.18
per cwt.
On Jan 5th, your rice harvest is finished; your local cash price is $17.30 per cwt and the Jan rice futures contract is trading at $17.38 per cwt.
Answer the following questions:
(11)

On Oct 30, what is the expected cash price for rice to be sold? __________ (4 pts)

(12)

How many futures contracts will you need to hedge all of your rice? _____ (4 pts)

(13)

To hedge, what position will you take in the futures market on Oct 30? __________ (4 pts)

(14)

What position will you take on Jan 5 to offset your original futures market position? ______ (4 pts)

(15)

What position will you have in the cash market on Jan 5? __________ (4 pts)

(16)

What is the actual basis on Jan 5? __________ (4 pts)

(17)

Did the basis narrow/strengthen or widen/weaken? (4 pts)

(18)

What was your realized sales price per cwt of rice? (4 pts)

(19)

Have you met your original sales price objective (why or why not)? (4 pts)

(20)

Would you have been better or worse off if you had been active only in the cash market (why or why not)? (4 pts)

A Double-T Account
Date
Oct
30th

Cash Market
Mkt Price Objective = $ _____cwt
Expected Cash Price = $__

Jan
5th

Futures Market
Long or Short
Position Taken? ______

/cwt Price? $___

Expected Basis = _____

Number of Contracts ___

Mkt. Position is
Long or short?

Contract Maturity date

/cwt

___

___

Price in the cash market = $

___/cwt

Offsetting Position Taken?

___
Actual Basis = _____ ___/cwt

Price? $

___/cwt

___

Price difference over time in cash

market (expected vs. actual): Up or
down and by how much?
$
___/cwt

Oct
1st

/cwt

Expected Yield = __________

Mkt. Position is

Basis

Result: Gain or loss ? Loss

How much? $ ___

Change in Basis?
Strengthened or Weakened?

/cwt
Change in Basis?
Narrowed or Widened?

Cash Price =
Futures Gain or Loss =
Realized Price =

$ _______
$ _______
$ _______

Marketing Objective Met? Yes or

No? Why?