Hedging and the Distribution of Firm Value

Suppose that your firm uses oil (either directly or indirectly) in making its product. If the price of oil increases, the value of your firm decreases. Conversely, if the price of oil decreases the value of your firm increases. The relationship between firm value and the price of oil is as shown below:

What if we buy a financial instrument whose value is positively related to the price of oil?