Assume you are a livestock producer wanting to hedge the risk related to the pri
ID: 1180571 • Letter: A
Question
Assume you are a livestock producer wanting to hedge the risk related to the price of feed and the price of livestock.Which of the following combined strategy is consistent with hedging these two price risks?
The producer should buy feed futures and sell livestock futures
The producer should sell feed futures and buy livestock futures
The producer should buy both feed and livestock futures
The producer should sell both feed and livestock futures
a.The producer should buy feed futures and sell livestock futures
b.The producer should sell feed futures and buy livestock futures
c.The producer should buy both feed and livestock futures
d.The producer should sell both feed and livestock futures
Explanation / Answer
a. The producer should buy feed futures and sell livestock futures.
When a producer knows that he will be making a purchase after sometime for feed, he will buy a futures contract as it will fix his price therefore reduce the risk of fluctuation of prices.
Whereas if you are selling a product (livestock in this case) you will have to sell futures to fix the price at which you will sell in the future therfore reducing the price risk and hedging the two price risks.