Question 2 a) Fern Oil Co. is expected to produce 100 million barrels of oil in June for sale at the indexedbased spot price. Its management however resolved later on to hedge 80% of its expected June production at a fixed price of $50.00 per barrel with Pine Oils in a SWAP contract (which is their best choice under the over-the-counter transactions presently). 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 $20 per barrel at the time specified for valuation in the contract, calculate the financial obligations/gain and comment on the results. (1 marks) ii) Assuming the index price of oil is $70.00 per barrel at the time specified for valuation in the contract, calculate the financial obligations/gain and comment on the results. (1 marks) iii) Explain the opportunity costs involved as well as the benefits to be accrued that management considered given the scenario above. (1 marks) 6 b) Following the initial considerations under the SWAP contract, another development ensued and based on market intelligence, the management of Fern Oil Co then decided to enter into a fixedprice physical contract with Pine Oil at an expected July production at a fixed price of $55 per barrel, but this time, hedging 50% of their specified production of 100 million barrels of oil. 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 $30 per barrel at the time specified for valuation in the contract, calculate the financial obligations/gain and comment on the results. (1 marks) ii) Assuming the index price of oil is $65 per barrel at the time specified for valuation in the contract, calculate the financial obligations/gain and comment on the results. (1 marks) iii) Explain to the management of Pine Oil Co. the salient distinguishing feature between the SWAP and the fixed-price physical contract at this point. (2 marks)