Ch. 2. - Review Questions
Market volatility and market risk are . . . ?
- are directly proportional - The greater the volatility of a futures contract (whatever the reason for that volatility) the greater the risk of a position in that contract.
A hedger is short the basis when he or she . . . ?
- has sold the cash commodity, but has no inventory, and therefore places a long futures hedge - A hedger who is short the basis wants futures prices to rise relative to cash prices (decreasing basis). This reflects the attitude of a long hedger who sold cash forward and must protect a later cash purchase by going long futures. A long hedger is long futures, short cash, and short the basis (and wants a weakening basis).
A hedged position may not provide total protection against adverse price movements because . . . ?
- while the hedge operates, the basis may change - Cash and futures prices respond to similar influences, but do not move in unison. Over time, the price difference between cash and futures (i.e., the basis) will change. Cash prices and futures prices do not move in unison; basis can change, creating a smaller or larger difference. The statement that various futures months seldom sell at the same price is incorrect because, while it is true that carrying costs will vary for various futures months, a hedged position trades price risk for basis risk. Transportation costs do not vary from one area to another because transportation costs are not part of carrying costs.
Which of the following best describes hedging? A) Involves assuming opposing positions in the cash and futures markets B) Represents an arbitrage between the cash and futures markets C) Is not used when prices are near all-time lows D) All of these
A) Involves assuming opposing positions in the cash and futures markets - A hedge involves equal, but opposite, cash and futures positions. The hedger buys futures when he has a short cash position or vice versa. Arbitrage is a trading strategy, whereas a hedge is a protection strategy. Long hedging is used whether prices are high or low.
Which of the following describe(s) hedging? A) Transfers price risk to others B) Increases the need for working capital C) Decreases long-term profits D) Substitutes the trustworthiness of an individual for that of an exchange
A) Transfers price risk to others - Hedging is method of transferring price risk to others. This is a useful tool often used by companies to deal with commodity price risk. This allows management to focus on the central core of their business rather than the peripheral risks and speculation of commodity prices.
A bull spreader in corn futures contracts consisting of a Mar and a Jun contract would: A) buy the Mar and sell the Jun B) sell the Mar and buy the Jun C) buy the Mar D) sell the Jun
A) buy the Mar and sell the Jun - A bull spread consists of buying the near (Mar) month and selling the far (Jun) month. The nearby month position determines if the spread is bull or bear.
A grain dealer with no inventory of soybeans sold forward an amount of soybeans for delivery next January. He hedges this forward sale by: A) buying futures B) selling futures and delivering against the contract C) selling futures D) going long futures and buying the actuals
A) buying futures - Because the dealer has already contracted to sell grain through a forward sale, his risk is that cash soybean prices will rise. To protect his risk he buys futures.
An oil retailer concerned about increasing heating oil prices would hedge by: A) buying heating oil futures B) negotiating forward contracts to buy and also selling heating oil futures C) negotiating forward contracts to sell and also purchasing heating oil futures D) selling heating oil futures
A) buying heating oil futures - The oil retailer will buy heating oil futures to provide protection against higher prices.
If several times prices failed to move above a price level on a chart, this indicates: A) resistance B) confirmation level C) congestion area D) support
A) resistance - Resistance creates a price ceiling.
If an oil refinery has purchased crude oil in a cash forward basis, in order to hedge, the refinery would: A) sell heating oil futures B) buy crude oil futures C) sell crude oil futures D) buy heating oil futures
A) sell heating oil futures - The refinery has contracted to buy crude oil on a fixed-price basis. Its risk is that after refining, heating oil prices (the processed crude oil product) will fall.
If an investor is bullish and feels bond prices may rise, and also considers the May T-bond futures overpriced in regard to the February contracts, he should: A) sell the May and buy the February futures B) buy puts on the May futures and sell calls on the February C) short the May T-bond futures D) sell calls on the May T-bond futures and buy puts on the February
A) sell the May and buy the February futures - If the investor feels May is overpriced in regard to February, then the best strategy is shorting the May futures and going long the Feb.
Which of the following positions is a synthetic call? A) Long future; short call B) Long future; long put C) Short future; long call D) Short future; long put
B) Long future; long put - Owning long futures and a long put has the same profit and loss potential of a long call. Unlimited upside profit potential and losses in the futures are offset by downside gains on the puts.
Which of the following would place selling hedge in lumber futures? A) Retailer short the cash lumber and related products B) Lumber and construction supplier stocked up on random lengths of Western Spruce-Pine-Fir prior to the building season C) Residential construction company needing to acquire inventory D) Lumber miller and wholesale distributor with forward contract commitments and cannot wait to to buy lumber in the future for fear of climbing prices
B) Lumber and construction supplier stocked up on random lengths of Western Spruce-Pine-Fir prior to the building season - The lumber and construction supplier who has inventory is concerned about falling prices and would sell a Random Length Lumber futures contract (selling hedge) thereby locking in the value of its cash inventory. That is the correct answer. By contrast, the wholesaler with forward sales may find some protection against rising prices by buying lumber futures for each lumber contract the company needs to acquire sometime later in the cash market. A builder who is looking to acquire lumber inventory (short the cash) and concerned about rising prices could buy a lumber futures contract (long the futures) to lock in a buy price. When the construction company obtains the needed lumber in the cash market, later on, it will sell the futures it purchased earlier for a gain if lumber prices rise as anticipated. The gain on the futures could make up for having to pay a higher cash market price.
Which of the following is a result of hedging? A) Increased net income B) Reduced working capital C) All of these D) Lower production costs
B) Reduced working capital - Hedges require cash for initial margin, thus reducing working capital. Hedging is used to control, not lower, production costs. Hedging also tends to stabilize, rather than increase, net income.
A mayonnaise manufacturer hedges the risk of increase in the costs of ingredients with: A) a short hedge in eggs B) a long hedge in eggs C) any of these D) a short hedge in soybean oil
B) a long hedge in eggs - To protect against price increases, the manufacturer should establish a long hedge in his input (eggs).
A hedger is long the basis when he has: A) sold grain for delivery "on track, country station" B) a short futures hedge against unsold inventory C) a long futures hedge against unsold inventory D) purchased a spot commodity, but has not yet placed a short futures hedge against it
B) a short futures hedge against unsold inventory - A hedger who is long the basis will profit if cash prices improve relative to futures prices (the basis increases). A long futures hedge against unsold inventory is a cash sale with specific delivery instructions. Sold grain for delivery "on track, country station" presents a long futures position rather than a hedge.
Which of the following (is) are TRUE regarding speculators in the futures market? Their trading activity: A) increases volume B) all of the these C) reduces price volatility D) provides liquidity
B) all of the these - These are some of the results produced by speculators in the futures market.
A processor holding an inventory of cottonseed oil who shorts soybean oil futures has placed a: A) processing spread B) cross-hedge C) weighted hedge D) box spread
B) cross-hedge - When a processor hedges a position in actuals (e.g., cottonseed oil) with an opposite position in a futures contract based on a different commodity (e.g., soybean oil), he has placed a cross-hedge. A processing spread occurs when a processor buys (goes long) futures contracts on its inputs and sells (short) on its outputs. A weighted hedge occurs when the futures position is larger or smaller than the actuals position it protects. (This will account for differing price variabilities) A box spread is an options trading strategy.
In a thin market, the price volatility of futures tends to: A) decrease B) increase C) remain the same D) none of these
B) increase - A thin market has few market participants. With few traders, substantial buying or selling has an amplified effect, causing an increased price volatility.
A thin market in a particular exchange involves: A) rising open interest B) risk of being unable to offset easily due to low liquidity C) better opportunity for profit D) less chance for unfavorable delivery
B) risk of being unable to offset easily due to low liquidity - A thin market carries the risk of low liquidity due to not enough buyers or sellers to easily offset positions.
If the Dec futures contract sells at a premium to the Mar futures contract in the same commodity of the following year, and the spreader believes the price difference will narrow, he would: A) buy Dec B) sell Dec and buy Mar C) sell Mar and buy Dec D) buy Mar
B) sell Dec and buy Mar - In an inverted market, where the price differences are expected to narrow, a spreader would prefer a bear spread. Here, the Dec contract is at a premium to the Mar contract; the Dec contract is expected to fall relative to the Mar contract (or the Mar contract to rise relative to Dec). To profit from this, the spreader should go long Mar and short Dec.
A long hedge operates as a: A) substitute sale B) substitute purchase C) speculation D) collateralization
B) substitute purchase - A long hedge is placed to lock in a purchase price. Current low prices can be enjoyed by going long (buying) futures as a temporary substitute for a later cash transaction. If prices subsequently rise, the gain on the futures offsets the higher cost of the cash purchase.
In an inverted market, a futures bear spread has: A) limited risk and limited profit potential B) unlimited risk and limited profit potential C) limited risk and unlimited profit potential D) unlimited risk and unlimited profit potential
B) unlimited risk and limited profit potential - A bear spread involves selling the near and buying the deferred. In an inverted market, risk is virtually unlimited. If the anticipated price climb in the deferred month does not occur, the deferred future will be sold at a loss.
If a customer goes long 3 Aug 1360 gold calls and shorts 3 Aug 1380 gold calls, this position is called a: A) diagonal spread B) vertical spread (price spread) C) horizontal spread D) bear call spread
B) vertical spread (price spread) - In a vertical spread (price spread), the only difference in the contracts is the strike price. In any spread, call or put, if you buy the lower strike price, it is bullish.
If an investor believes that MNO Company will outperform the overall stock market, how may the spreader best accomplish an alpha capture? A) Buy futures on a stock index and sell futures on MNO B) Write puts calls on MNO and buy MNO single stock futures C) Buy single stock futures on MNO and sell futures on a stock index D) Buy single stock futures on MNO
C) Buy single stock futures on MNO and sell futures on a stock index - If the investor is bullish on MNO common relative to the overall market, he should buy the futures on MNO and sell stock index futures. Merely buying MNO single stock futures does not accomplish a spread. Put writing is a bullish position and so is buying MNO futures. If both positions are bullish, the intent of the spread is not achieved.
In August, a plywood dealer places an order with a miller for shipment in March. If both the dealer and the miller hedge by taking positions in June futures, which of the following statements is TRUE? A) In August, the miller should buy Jun futures and sell cash lumber (a selling hedge). He should sell his Jun futures in March and buy cash lumber. B) In August, the miller should buy Jun futures and sell cash lumber (a buying hedge). He should sell his Jun futures in March and buy cash lumber. C) In August, the lumber dealer should buy Jun futures and sell cash lumber (a buying hedge). He should sell his Jun futures in March and buy cash lumber. D) In August, the lumber dealer should buy Jun futures and sell cash lumber (a selling hedge). He should sell his Jun futures in March and buy cash lumber.
C) In August, the lumber dealer should buy Jun futures and sell cash lumber (a buying hedge). He should sell his Jun futures in March and buy cash lumber. - The dealer should hedge a future purchase with a buying hedge.
If a company that owns office buildings wants to protect against a rise in heating oil prices, which of the following is an appropriate hedge? A) Buy cash forward and short futures B) Sell cash forward and long futures C) Long Futures D) Short futures
C) Long Futures - The building owner must buy heating oil and faces the risk that prices will rise. The building owner hedges with long futures or call options on futures that increase in value when the market moves against her cash position. Answer B refers to a long hedger protecting a forward sale, such as a heating oil distribution. The hedger would not sell either cash or futures.
A futures market hedge is: A) established only when prices are expected to move in the profit direction of the hedge (e.g., down if the hedge is a short futures position) B) placed in the nearby commodity futures contract C) a temporary substitute for a later sale of the cash commodity D) established only by speculators
C) a temporary substitute for a later sale of the cash commodity - If a hedger plans to sell the cash commodity later, he protects his risk by selling futures. The short futures operates as a temporary sale of his cash position. Hedges protect the risk that prices will change between today and when a cash transaction will occur. Hedges can be placed regardless of whether the hedger expects an adverse price move (prices are never assured). Typically, the hedge is placed in a futures contract that becomes deliverable approximately when the hedger's cash transaction will occur.
To hedge against a forward cash sale, a customer should: A) sell futures B) arbitrage C) buy futures D) make a substitute sale
C) buy futures - The forward cash seller typically must purchase the underlying commodity to be sold. A buying (long) hedge protects against a higher purchase price.
A hedger who computes the basis for a particular transaction calculates: A) the cost of business plus 50% of the cost as a profit B) transportation costs only, assuming that prices will remain stable C) carrying charges, transportation, allowance for overhead, and profit D) carrying charges and transportation costs only
C) carrying charges, transportation, allowance for overhead, and profit - When determining whether to hedge, a producer must consider all costs, including profits, because they determine if the producer should ultimately produce the commodity.
A hedger establishes a futures position opposite to his cash position. He is most concerned with: A) the cash price B) whether the cash and futures markets will increase or decrease C) changes in the basis D) the futures price
C) changes in the basis - The hedger is concerned with the difference between the cash and futures prices (basis). The hedger uses futures to reduce risk associated with a cash position.
A short hedge protects against: A) substantially rising and falling prices B) none of these C) falling prices D) rising prices
C) falling prices - A short hedge (short futures) protects only against a decline in a cash price because the short futures contract profits as prices fall. A long or buying hedge protects against rising prices.
An individual who sells a product and buys futures in a component commodity is a: A) farmer B) spreader C) hedger D) speculator
C) hedger - A flour miller who has sold forward an amount of flour is hedging (protecting) a later purchase of wheat with long wheat futures to lock in a price. Wheat is the material (input) he must process into flour to deliver against his forward contract. Speculators have no interest in owning or providing the physical commodity. Speculators accept the risk that hedgers want to avoid. A spreader is simultaneously long and short futures contracts, and is not involved in selling the actual commodity product. Because farmers simply produce and sell the commodity product at the spot price in effect at the time of harvest, they may become hedgers by buying or selling futures contracts.
Compared to net long and net short positions, spread positions typically require: A) lower margin and have higher risk B) higher margin and have lower risk C) lower margin and have lower risk D) higher margin and have higher risk
C) lower margin and have lower risk - Spread positions typically have less risk than net long or short futures positions and carry lower margin requirements. However, spreads are not without risk.
When hedging a position in a specific stock using futures on the NYSE or S&P 500 index, basis risk depends on the relationship between the: A) futures price and the stock index B) price of the futures price to the stock index beta C) price of the individual stock and the futures price to the stock index D) price of the individual stock and the individual stock average
C) price of the individual stock and the futures price to the stock index - For an effective hedge, futures and cash price movements should correspond or correlate; the individual stock and the index should move in correlation. The current price of a stock, compared to that stock's average, is not meaningful in terms of basis risk of a stock index and a futures. Basis risk also involves the similarity of movement between the index and the futures price. Basis risk includes how the individual stock moves compared to the index.
A sugar refining company is concerned about a decline in sugar prices. To hedge, the company should: A) buy sugar in the cash market and buy sugar futures B) make a cash forward sale and sell sugar futures C) sell sugar futures D) buy sugar futures
C) sell sugar futures - Because it sells sugar, the company's risk is a decline in sugar prices. To protect against this risk, the company sells sugar futures.
A portfolio manager holding long-term fixed-income securities is most likely to hedge against a rise in interest rates by: A) selling T-bill futures B) buying T-bill futures C) selling T-bond futures D) buying T-bond futures
C) selling T-bond futures - Because the portfolio manager's cash position is long, she hedges by going short (selling) T-bond futures. A portfolio of long-term securities is hedged most effectively with an equal, but opposite position in futures on a long-term debt instrument. T-bill futures represent three-month maturities. T-bonds have 10- to 30-year maturities.
A customer offsets a position in the current delivery month and simultaneously takes a new position in a deferred futures month. This is a: A) hedge order B) spread order C) switch order D) give-up order
C) switch order - The customer placed a switch order and switches from one delivery month to another (also called "rolling forward" ).
Which of the following describe(s) systematic hedging? A) May increases long-term profitsAll of these B) Reduces the need for working capital C) Transfers price risk to others D) All of these
D) All of these - These are all potential advantages of systematic hedging. Hedging reduces the amount of capital involved, transfers price risk, can increase profits, and transfers price risk to others. Hedging can also increase long-term profits and reduce the need for working capital.
A manufacturing company needs to hedge the later purchase of 350,000 pounds of copper. What is the appropriate position in copper futures (25,000 pounds per contract) to hedge the company's cash position? A) Long 10 contracts B) Short 20 contracts C) Short 12 contracts D) Long 14 contracts
D) Long 14 contracts - The wire manufacturer will buy cash copper as an input to its business. To hedge the risk that copper prices may rise, the manufacturer buys copper futures. To determine the position size, divide the purchase (in this case 350,000 pounds of copper) by the contract size (25,000 pounds) equals the number of contracts (14).
A buy hedge is most likely used by: A) an elevator to protect its inventory B) a farmer to protect his crop C) none of these D) a refiner to protect his delivery contracts
D) a refiner to protect his delivery contracts - A refiner risks rising input costs. A long hedger would make a substitute purchase in the futures market to protect against a price rise that would adversely affect a later cash transaction. A producer would most likely make a sell hedge to lock in a sale price for his farm product at a later date. A storage agent is concerned about the future price of a held product, and may make a short, or selling, hedge.
A buy hedge is most likely used by: A) a farmer to protect his crop B) none of these C) an elevator to protect its inventory D) a refiner to protect his operating costs
D) a refiner to protect his operating costs - A refiner risks that his input costs will rise. A long hedger makes a substitute purchase in the futures market to protect against a price rise that adversely affects a later cash transaction.
A hedger is long the basis when he or she has: A) sold grain for delivery by means known as "on track, country station" B) purchased a spot commodity, but has not yet placed a short futures hedge against it C) a long futures hedge against unsold inventory D) a short futures hedge against unsold inventory
D) a short futures hedge against unsold inventory - A hedger who is "long the basis" will profit if cash prices improve relative to futures prices (the basis increases). A long futures hedge against unsold inventory is a cash sale with specific delivery instructions. Sold grain for delivery by means known as "on track, country station" presents a long futures position rather than a hedge.
A spread can be made: A) within the same market, different commodities B) between different markets, same commodities C) between the same commodities, different months D) all of these
D) all of these - A spread relationship can exist between any combination of the contracts shown including an inter-commodity spread, an inter-delivery spread, or an inter-market spread.
In a normal market, where the difference between distant futures and near futures is expected to narrow, a spreader would: A) tighten the supply B) sell short C) buy short D) buy near futures and sell distant futures
D) buy near futures and sell distant futures - This is a bull spread. In a normal market, distant months carry higher prices than near months. If this difference is expected to decrease, the nearby contract should rise relative to the distant contract (or the distant should fall relative to the nearby).
A trader observes that the spread between two different months in lean hogs futures is $.05. The distant month is priced at $.77, and the near month is priced at $.72. The trader believes that the spread of $.05 is excessive and will narrow. In order to profit from his assumption, he: A) sells the near month and buys the distant month B) sells the distant month C) buys the near month D) buys the near month and sells the distant month
D) buys the near month and sells the distant month - To profit from the spread narrowing in a normal agricultural market, the trader buys the near and sells the deferred month.
Hedging does not eliminate market risks because of: A) indeterminate futures prices B) margin requirements being lower, leverage being higher C) spot volatility D) changes in basis
D) changes in basis - The hedger assumes basis risk-the danger that the relationship between futures and actuals will change adversely. However, this risk is limited and calculable.
A hedger establishes a futures position opposite to his cash position and is most concerned with: A) the futures price B) whether the cash and futures markets will move up or down C) the cash price D) changes in the basis
D) changes in the basis - A hedger is concerned with changes between the cash and futures prices (basis). Hedgers use futures to reduce the risk of a cash position. If the cash price moves, the futures prices will also normally move in the same direction, and if the futures price moves, the current cash price will also normally move in the same direction, but usually in differing amounts. The purpose of hedging is to lessen risk of price movement, up or down, as the futures contract's gain or loss usually offsets what is happening on the current cash contract.
A broiler chicken processor seeking protection against increasing feed costs would: A) offset short corn futures B) short wheat futures C) offset long rough rice futures D) go long soybean meal futures
D) go long soybean meal futures - The processor hedges by buying soybean meal futures. The processor is a long hedger with respect to his inputs. He would go long futures to protect the later purchase of those items. Soybean meal is the most appropriate chicken feed. All the other answers are selling futures, not buying them.
Regarding spreads, a representative may tell a customer that they: A) are always less risky than simple long or short positions B) involve no risk because the investor is both long and short C) are always more risky than simple long or short positions D) may not be less risky than simple long or short positions
D) may not be less risky than simple long or short positions - Because it is possible for both legs of a spread to move against a customer, a spread is not safer than a simple long or short position. The CFTC requires that this be disclosed in a risk disclosure statement.
A grain broker contracted to deliver cash grain at a specified price would hedge by: A) purchasing cash grain B) selling cash grain C) selling grain futures D) purchasing grain futures
D) purchasing grain futures - Assuming the broker does not have the grain that he contracted to sell, he seeks upside protection. Buying the futures will offset loss he may incur from higher grain prices.
A thin market in any particular exchange involves: A) less chance for unfavorable delivery B) rising open interest C) better opportunity for profit D) risk being unable to offset at a fair price because of low liquidity
D) risk being unable to offset at a fair price because of low liquidity - A thin market involves the risk of low liquidity-not enough buyers or sellers to offset positions.
A sell stop order is only used to liquidate a long position. True or False?
False. - A sell stop order can be used to initiate a short position. However, most sell stop orders are used to protect long positions.
A relatively inexperienced futures investor should establish spreads (rather than net long or short positions) because they involve lower margins and lower risk. True or False?
False. - Although spreads have lower margin requirements, they are not always safer than outright long or short positions-under certain conditions, both legs of the spread can move against the spreader.
True or False? You would be considered a bona fide hedger if you were a manufacturer of chocolate candy and you sold cocoa futures.
False. - As a candy manufacturer, you must buy cocoa as an input into your production process. To be a bona fide hedger, a candy producer must be long cocoa futures to hedge a later cash purchase of cocoa.
True or False? In general, an elevator operator who purchases grain and hedges plans to deliver the grain on each futures contract he sells.
False. - Delivering against a futures contract requires the short to bear the cost of delivery (transportation to the designated delivery point, inspection and grading, transshipping, etc.). Generally, it is simpler and less expensive to sell in a local cash transaction.
True or False? In a bull market, distant futures months rise faster than the nearby futures month.
False. - Investors and speculators are less likely to bid prices up (or down) in the distant months because their nearby months provide greater liquidity.
The price of feeder cattle can be hedged with short live cattle futures. True or False?
False. - Live or fat cattle are "finished" and are ready for the meat packing plant. The finished full weight animals are the end product of the feedlot whereas the feeder cattle are likely far behind and likely fall outside contract periods. Unlike grain which is a storable commodity, cattle are not. Live cattle producers are mostly likely to hedge against falling live cattle prices by taking up a position in live cattle futures.
A spreader buys and sells the same futures contract simultaneously. True or False?
False. - Simultaneously buying and selling the same contract offsets one position with the other, leaving the spreader with no futures position.
Speculators add volatility to the market. True or False?
False. - Speculators provide liquidity to the marketplace which tends to aid hedgers and reduce volatility.
True or False? Active speculation in the futures market increases the degree of price volatility.
False. - Studies indicate that futures markets decrease in price volatility over time.
True or False? A grain elevator operator has a forward contract with a farmer and wants to purchase a specific amount of soybeans at an established price 4 months from now. To protect against prices falling during this period, the elevator operator should buy an equal amount of soybean futures contracts.
False. - The operator requires a futures position that protects against falling prices (a short position in soybean futures).
A firm or an individual who buys a futures contract against a cash forward sale is often: ?
Hedging. - Opposite cash and futures positions usually indicate hedging. A long hedger makes a substitute purchase in the futures market to protect against a later cash market purchase costing more.
True or False? Speculators normally avoid a thin market.
True. - A thin market describes an illiquid market. Both speculators and hedgers seek liquid markets with more participants and greater volume. When markets are liquid, positions can be initiated or closed without causing undue price volatility.
Although a spread position may carry less risk of loss than an outright long or short position, this does not mean potential losses on spreads are more controllable and that spreads are therefore safer. True or False?
True. - Both sides of a spread can move against the spreader and produce substantial losses.
True or False? Buying and selling the same commodity for different delivery months or on different exchanges is permitted.
True. - Buying and selling the same commodity inter-delivery and inter-market makes the customer a spreader.
True or False? Speculators provide liquidity.
True. - More participation by speculators (or anyone for that matter) provides more liquidity. Greater liquidity is a consequence of speculator involvement, but that is not why speculators trade.
Pyramiding is a trading technique where unrealized profits are reinvested. True or False?
True. - Pyramiding is a speculative strategy in which an investor uses unrealized profits to increase the size of a position by smaller and smaller amounts.
The speculator's motive is profit. True or False?
True. - Speculators assume the same price risk that hedgers avoid, for the chance to profit from favorable price changes.
True or False? Producers can hedge the sale price of feeder cattle by selling feeder cattle futures contracts.
True. - To implement a short hedge, feeder cattle producers short enough feeder cattle futures contracts to cover the feeder cattle to be produced. Conversely, the sale price of feeder cattle cannot be hedged by selling live cattle futures. Live or fat cattle are the output of a feedlot, while feeder cattle heifers (young and not yet bearing) are its input.
