Determine whether the following transaction involves spot change, contracts of v

Question

Determine whether the following transaction involves spot change, contracts of vertical integration:

a. A major oil company refines gasoline from crude oil wells that it owns.

b. Transcontinental, an interstate natural-gas pipeline, has a legal obligation to purchase a specified amount of natural gas per week from a well owned by Fred Smith in Enid, Oklahoma.

c. A cabinetmaker purchases a dozen wood screws from the local hardware store.

d. An electric utility purchases coal from an underground mine.

Explanation / Answer

A spot exchange involves on-the-spot settlement of cash in lieu of the goods (or services) purchased (or sold). This transaction is of an immediate nature. But a contract of vertical integration involves on-going agreement between two parties in different stages of the same supply chain, to engage in arms-length agreement of purchase and supply, and cash settlement is not necessarily needed to be immediate.

(A) It is a spot exchange because the company is using its own resources in refining gasoline.

(B) It's a contract of vertical integration by definition as explained above.

(C) This is a spot exchange. Cash is settled as oon as the sale/purchase is completed.

(D) It's a contract of vertical integration by definition, being a longer-term transaction.

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