Question

Company X, which is a chemical manufacturer, uses crude oil and buys it in the spot market on a monthly schedule. A crude oil swap is quoted by the dealer at $25. Which of the following statements is correct?a. The company should sell the swap to hedgeb. In a month when the spot price of oil is above $25, the company will pay the difference to the counter partyc. In a month when the spot price is below $25, the company will pay the difference to the counter party

Answer 1

Answer:

c. In a month when the spot price is below $25, the company will pay the difference to the counter party

Explanation:

• Since Company X uses crude oil, the company buys the swap to hedge in the swap market, so option A is not appropriate because it buys the swap, which pays the counterparty when the spot price falls below $ 25.
• so correct option is c. In a month when the spot price is below $25, the company will pay the difference to the counter party