**Question 598** future, tailing the hedge, cross hedging

The standard deviation of monthly changes in the spot price of lamb is $**0.015** per pound. The standard deviation of monthly changes in the futures price of live cattle is $**0.012** per pound. The correlation between the spot price of lamb and the futures price of cattle is **0.4**.

It is now January. A lamb producer is committed to selling **1,000,000** pounds of lamb in May. The spot price of live cattle is $**0.30** per pound and the June futures price is $**0.32** per pound. The spot price of lamb is $**0.60** per pound.

The producer wants to use the June live cattle futures contracts to hedge his risk. Each futures contract is for the delivery of **50,000** pounds of cattle.

How many live cattle futures should the lamb farmer sell to hedge his risk? Round your answer to the nearest whole number of contracts.

**Question 825** future, hedging, tailing the hedge, speculation, no explanation

An equity index fund manager controls a USD**500** million diversified equity portfolio with a beta of **0.9**. The equity manager expects a significant rally in equity prices next year. The market does not think that this will happen. If the fund manager wishes to increase his portfolio beta to **1.5**, how many S&P500 futures should he buy?

The US market equity index is the S&P500. One year CME futures on the S&P500 currently trade at **2,155** points and the spot price is **2,180** points. Each point is worth $**250**.

The number of one year S&P500 futures contracts that the fund manager should buy is: