Ag Decision Maker Activity
Hedging of Livestock
File B2-50
Name ________________________
Using File B2-50, answer the questions below
1) Farmer Jones placed a hedge on 50,000 pounds of live cattle for $60
per hundredweight. Since placing the hedge, prices have risen so
Jones has had to make additional margin deposits. Compute the
interest on margin money assuming the following provisions.
a)
b)
c)
d)
e)
f)
contract held for 6 months
10 percent interest rate
initial deposit of $1,000
additional deposit of $300 after two months
additional deposit of $400 after three months
additional deposit of $600 after five months
Initial margin
_______________
Additional margin
_______________
Additional margin
_______________
Additional margin
_______________
Total interest
_______________
Interest per cwt.
_______________
Ag Decision Maker Activity Continued…
Hedging of Livestock
File B2-50
2) It is February and Farmer Jones has 270 hogs that will be marketed in
June. Jones has decided to hedge one contract on the CME (40,000
pounds or about 220 hogs).
Assume
June futures
Expected June basis
Brokerage fee
Interest on margin
Cost of production
$80.00
3.50
.20
.15
68.00
a) What is the expected net hedge price?
_______________
b) What is the expected net profit per cwt?
_______________
c) What is the net profit per cwt. from the hedge if the actual futures
price in June is $90.00, basis is $4.00, and interest on margin is
$.30?
_______________
d) Why is the actual net profit different than the expected net profit?
_______________
e) What is the net profit per cwt. in "c" above from the unhedged hogs?
_______________
f) How much of the production is hedged and how much is unhedged?
_______________
Ag Decision Maker Activity Continued…
Hedging of Livestock
File B2-50
g) What is the net profit in "c" above from all of the hogs?
_______________
h) What is the net profit in "c" above if the hedge is not placed and all of
the hogs are sold on the cash market in June?
_______________
i) What is the net profit per cwt. from the hedge if the actual futures
price in June is $70.00, basis is $3.00, interest on margin is $.10?
_______________
j) What is the net profit per cwt. in "i" above from the unhedged hogs?
_______________
k) What is the net profit in "i" above from all of the hogs?
_______________
l) What is the net profit in "i" above if the hedge is not placed and all of
the hogs are sold on the cash market in June?
_______________
. . . and justice for all
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Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S.
Department of Agriculture. Jack M. Payne, director, Cooperative Extension Service, Iowa State University of Science and
Technology, Ames, Iowa.