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So, you have 100,000 gallons of gas in your underground tank. You bought it last week for 3$/gallon.
Next week, you can buy gas for 4$/gallon.
Someone comes by, and offers to buy 100 gallons of gas from you at 3.25$/gallon. Do you sell him gas?
1> You sell him gas. You earn 325$, and place it in a bank account that earns 6%/year. Next week, you have to buy 100 more gallons of gas. You earn 36 c in interest, and pay 400$ more for gas next week.
Total loss: $74.64
2> You don't sell him gas.
Total loss: $0
I think you don't sell him gas.
Instead, you set your prices at some amount above 4$, so when you refill your tank next week you won't lose money.
If prices go down, and you are smart, you do the same thing: if you bought the gas for 4$, and next week the price will be 3$, you sell gas below 4$ and above 3$. This means you lose money -- but you lost the money when you bought the gas. Selling the gas for $3.10 then replacing it for $3 is profitable.
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Last edited by JHVH : 10-29-4004 BC at 09:00 PM. Reason: Time for a rest.
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