Short hedge example with futures
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"This guide describes how to place an output (short) hedge in the futures market to reduce the price risk associated with selling an output used in your business. For example, assume that John, a cattle producer, knows he will be selling a pen of cattle two months from now. John knows that by selling live cattle for over $122 per hundredweight, he can ensure a satisfactory profit. Currently, the local live cattle price is $124 per hundredweight, but John believes that the price may drop during the next few months. By knowing the cost of production of these animals, John knows that $124 per hundredweight will allow for a satisfactory profit. What can he do to reduce his risk from a potential drop in prices? John cannot sell the cattle now because the cattle are too light, but he could enter the futures market and offset any loss in value (decrease in price) with a gain in the futures market." -- first page
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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 License.
Provided for historical documentation only. Check Missouri Extension and Agricultural Experiment Station websites for current information.
Provided for historical documentation only. Check Missouri Extension and Agricultural Experiment Station websites for current information.