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 $3.00 per gallon.Swenson hedged its position by contracting to purchase 400,000 gallons of oil for November delivery at a price of $2.50 per gallon.If the November spot price is $2.75 per gallon,the payoff to Swenson is:

Question

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Swenson Oil & Gas hedged their position by contracting to purchase 400,000 gallons of oil for November delivery at a price of $2.50 per gallon. Therefore, they will pay $1,000,000 (400,000 gallons x $2.50 per gallon) for the oil in November.
Customers have prepurchased 400,000 gallons of oil at $3.00 per gallon, which means they have paid Swenson $1,200,000 (400,000 gallons x $3.00 per gallon) in June.
If the November spot price is $2.75 per gallon, Swenson will have saved $0.25 per gallon on 400,000 gallons of oil, which means they have saved $100,000 (400,000 gallons x $0.25 per gallon).
Therefore, the payoff to Swenson is $100,000.

Swenson Oil & Gas Allows Its Customers to Prepurchase Heating