Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter. Customers who took advantage of the offer prepurchased 400,000 gallons of oil at $3.50 per gallon. Swenson hedged its position by contracting to purchase 400,000 gallons of oil for November delivery at a price of $3.00 per gallon. If the November spot price is $3.85 per gallon, Swenson's gross profit on the heating oil sold in June will be

Question

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Swenson sold the oil at $3.50 per gallon and hedged the purchase at $3.00 per gallon. The difference is $0.50 per gallon. For 400,000 gallons, the gross profit is 400,000 gallons * $0.50/gallon = $200,000.

Swenson Oil & Gas Allows Its Customers to Prepurchase Heating