On June 30, the manager of the oil company’s refinery (located in Chicago) notes that the spot price of Chicago gasoline is $2.00 per gallon. At the same time, the price of August gasoline futures contracts is $1.97 per gallon. The manager anticipates selling 4.2 million gallons of gasoline in the Chicago area during July, and sells 100 gasoline futures contracts at $1.97 on June 30 to hedge its gasoline price exposure. (NOTE: each gasoline futures contract calls for delivery of 42,000 gallons of gasoline in New York Harbor). Answer the following:
a. As of June 30, what is the refining manager’s best estimate of its selling price of gasoline in Chicago during July?
b. During July, the refinery purchased August gasoline futures contracts at a weighted average price of $2.05 per gallon. During July, the weighted average spot price of Chicago gasoline is $2.10 per gallon. What is the refiner’s effective sales price of gasoline during July (after accounting for hedging gains or losses) given that the refiner sells gasoline in Chicago at prevailing spot prices?