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Abstract

The cattle market is known for its extreme price fluctuations that can make a pauper out of a prince. The boom or bust nature of the industry is nothing new, as the change in prices can be fairly dramatic. Since the price that a cattle feeder receives for his cattle has a large impact on his profits, the severe price changes have had a major impact on the variation in net profits for cattle feeders. If a cattle feeder is going to reduce his price risk by using selective hedging, he has to either (a) be a good price forecaster or (b) have some strategy that is less subjective than price forecasting. If his judgement is incorrect, he could be hedged when the price is increasing and unhedged when the price is decreasing, increasing the volatility of his income and decreasing the average income. Therefore, if the entrepreneur is going to be able to use the futures market to protect himself from price declines, he will need to be able to determine when the futures price is going to fall.

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