National Fuel allows its customers to prepurchase heating oil in May 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 $3.25 per gallon, the payoff to Swenson is

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Swenson's payoff is calculated by the difference between the price at which they sold the oil to customers ($3.50 per gallon) and the price they contracted to buy it for November delivery ($3.00 per gallon). This difference is $0.50 per gallon. For 400,000 gallons, the total payoff is 400,000 gallons * $0.50/gallon = $200,000. However, since they hedged, the actual spot price in November ($3.25) does not affect their contract, and the initial calculation stands corrected to reflect the proper understanding of the hedging strategy.

National Fuel Allows Its Customers to Prepurchase Heating Oil in May