Suppose you are the owner of U$.$S$.$ retail store and purchase tableware worth one million Euros $()$ from Bernardaud, the French manufacturer. To provide time for you to sell your new inventory of tableware, Bernardaud gives you one year to pay. You are concerned that the Euro might rise in value before next year and reduce your profits. To hedge this risk, you call your bank and lock in a one$-$year forward contract with a forward price of $$2/.$

b$.(25$ points$)$ Now you turn the clock ahead one year and evaluate the results of your forward contract. Suppose the maturity market $($spot$)$ prices were given as in the first column of the table. To show the payoff profile from your decision to lock in the forward Euro price, present the gains or losses for each maturity market $($spot$)$ price in the following table.

Profit or Loss Profiles for Long Forward

Market $($Spot$)$ Price

at Maturity

Gains$/$Losses

per Euro

$$1\mathrm{.}70/$Euro

$$1\mathrm{.}80/$Euro

$$1\mathrm{.}90/$Euro

$$2\mathrm{.}00/$Euro

$$2\mathrm{.}10/$Euro

$$2\mathrm{.}20/$Euro

$$2\mathrm{.}30/$Euro

Your Answer:

Market $($Spot$)$ Price

at Maturity

Gains$/$Losses

per Euro

$$1\mathrm{.}70/$Euro

$$0\mathrm{.}30$

$$1\mathrm{.}80/$Euro

$$0\mathrm{.}20$

$$1\mathrm{.}90/$Euro

$$0\mathrm{.}10$

$$2\mathrm{.}00/$Euro

$$0\mathrm{.}00$

$$2\mathrm{.}10/$Euro

$$-0\mathrm{.}10$

$$2\mathrm{.}20/$Euro

$$-0\mathrm{.}20$

$$2\mathrm{.}30/$Euro $$-0\mathrm{.}30$

Show the payoff profile graph $($profit$/$loss diagram$)$ which describes the relationship between the market $($spot$)$ price of the Euro and the value $($gains or losses$)$ of your position. Show titles of y and x axis.