Explanation

Given:

• Bank's position: Short GBP (selling GBP)
• Contract amount: GBP 40,000,000
• Contract rate: EUR 0.80 per GBP
• Spot rate at maturity: EUR 0.85 per GBP

Calculation:

1. The bank is obligated to sell GBP at EUR 0.80 per GBP
2. Current market rate is EUR 0.85 per GBP
3. The bank could sell GBP at EUR 0.85 in the market, but is forced to sell at EUR 0.80
4. Loss per GBP = 0.85 - 0.80 = EUR 0.05
5. Total payoff = 40,000,000 × (-0.05) = EUR -2,000,000

Explanation: The bank has a short position in GBP. When the GBP strengthens (EUR/GBP increases from 0.80 to 0.85), the bank suffers a loss because it must sell GBP at a lower price than the current market rate. The payoff is EUR -2,000,000 (Option B).