Question: The price of heating oil today (October 16) is $2.10 per gallon. A heating oil company offers customers the opportunity to lock in heating oil for January 16 delivery at the forward price. The risk-free rate is 5% for all times (continuous compounding).
Now suppose that on November 16, heating oil has dropped to $1.80 per gallon and the risk-free rate has risen to 6% for all times. How much has the customer gained or lost by locking in the price? How much has the company gained or lost? First compute your answer ignoring the storage costs and then compute your answer if it costs 2 cents on November 16 to store a gallon of heating oil for 2 months.