The standard deviation of monthly changes in the spot price of live cattle is (in cents per pound) 1.3. The standard deviation of monthly changes in the futures price of live cattle for the closest contract is 1.4. The correlation between the futures price changes and the spot price changes is 0.81. It is now February 15. A beef producer is committed to purchasing 200,000 pounds of live cattle on July 15. The producer plans to use the August live-cattle futures contracts to hedge its price risk. Each contract is for the delivery of 40,000 pounds of cattle.
a. Should the producer take a long or short position in the futures contracts?
b. Using a minimum variance hedge ratio, how many contracts are needed? (Round to nearest full contract.)