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Answer: EUR -2,000,000
## 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).
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A French bank enters into a 6-month forward contract with an importer to sell GBP 40 million in 6 months at a rate of EUR 0.80 per GBP. If in 6 months the exchange rate is EUR 0.85 per GBP, what is the payoff for the bank from the forward contract?
A
EUR -2,941,176
B
EUR -2,000,000
C
EUR 2,000,000
D
EUR 2,941,176