Cattle prices are currenlty $0.70/pound and hog prices are $0.60/pound. Expecing the price difference between cattle and hogs to continue to grow wider, a spread trader puts on a long June CME live Cattle/short June CME Lean Hog spread trade (one contract each). Three months later when the change in the spread differential reaches $0.15 per pound, she liquidates the position.
(1) When she initiated the spread trade, which contract did she believe would rise more? Which contract was over-priced?
(2) What is the initial cattle-hog spread?
(3) What profit does the spread trader make on the trade ($/pound)?