You expect to receive 1 million in one year. Spot and forward rates are S₀^/ = F₁^/ = 1.25/. The sale is invoiced in pounds.

a. Identify your expected pound cash flow on a timeline. Draw a risk profile for this exposure in terms of euros per pound. If the spot rate in one year is S₁^/ = 1.50/, what is your gain or loss on this transaction?

b. How would you hedge this exposure with a forward contract? Use timelines and a risk profile to illustrate the effect of the hedge.