Exhibit 23.4 Use the Information Below for the Following Problem(S)

question 51

Multiple Choice

Exhibit 23.4
Use the Information Below for the Following Problem(S)
Black Gold Industries (BGI) is an independent oil producer with production capacity of 500,000 barrels per month. Due to the cost structure of the business, BGI needs to receive $56.50 per barrel in order to remain solvent. On the other side of this situation is Petrochemicals Unlimited (PU) which uses an average of 500,000 barrels of West Texas crude oil in its normal production operations. The nature of PU's business is such that they will financially suffer if they have to pay more than an average of $57.80 per barrel for oil over the next six years. To hedge against their exposure to volatile oil prices, BI and PU contact a swap dealer to arrange the six-year oil swap described below:
- Settlement is made monthly.
- The notional principal is for 500,000 barrels per month.
- The monthly WTI index value is determined as the average of the daily settlement prices for the crude oil futures contract traded on the New York Mercantile Exchange (NYMEX) .
- The swap dealer pays BGI $57.00 per barrel.
- BGI pays the swap dealer the average NYMEX Oil futures price per barrel.
- PU pays the swap dealer $57.50 per barrel.
- The swap dealer pays PU dealer the average NYMEX Oil futures price per barrel.
-Refer to Exhibit 23.4.Barring default by PU or BGI,how much compensation does the swap dealer receive each month?

• A) $150,000
• B) $210,000
• C) $175,000
• D) $250,000
• E) None of the above

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Definitions:

Glaciers

Large masses of ice that form on land from the accumulation and compaction of snow, moving slowly over time.

Seasonal Effects

The variations in natural or social phenomena that occur at specific times of the year due to Earth's changing position relative to the sun.

Isotopes

Variants of a particular chemical element that have the same number of protons but different numbers of neutrons.

Evaporation

The process by which water changes from a liquid to a gas or vapor, a key part of the Earth's water cycle and energy balance.