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

question 28

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.Describe the transaction that occurs between BGI and the swap dealer if the monthly average oil futures settlement price is $58.45.

Definitions:

Prescription Drug

Medications that are legally dispensed only by a prescription from a licensed healthcare provider.

Some Depressants

Substances that decrease or slow down central nervous system activities, affecting mental and physical functions.

Teratology

The study of abnormalities of physiological development, focusing on the causes and biological processes behind birth defects.

Exposure

The state of being subject to or presented with a particular environment, situation, or condition, which can lead to various psychological or physiological responses.