Reference no: EM133180218

Question - Following the initial considerations under the SWAP contract, another development ensued and based on market intelligence, the management of Booster Oil Co then decided to enter into a fixed-price physical contract with Leana Energy Company Limited at an expected July production at a fixed price of $60 per barrel. Again, management being aware of the opportunity costs involved as well as the benefits to be accrued were keen on considering the following assumptions for due diligence.

i) Assuming the index price of oil is $75 per barrel at the time specified for valuation in the contract, calculate the financial obligations/gain and comment on the results.

ii) Assuming the index price of oil is $30 per barrel at the time specified for valuation in the contract, calculate the financial obligations/gain and comment on the results.

iii) Explain to the management of Booster Oil Co. the salient distinguishing feature between the SWAP and the fixed-price physical contract at this point.

iv) As a consultant you are to explain to booster management four (4) cardinal issues to consider which are unique to the fixed-price physical contract.

v) Upon thorough reflection, the finance director rather suggested that Booster Oil Co. should consider a PUT Option contract. You are required to explain to the management the main distinguishing features of this particular contract in relation to the SWAP contract.