Final answer:
The question involves comparing profits and constructing graphs to demonstrate the outcomes when a firm, which produces copper, does or does not hedge against copper price risk. Hedging ensures a certain profit despite market volatility, whereas not hedging can result in variable profits based on future market prices.
Step-by-step explanation:
The question is about assessing profit under two scenarios for a firm XYZ that deals with copper production: one without managing copper price risk (unhedged) and another with managing the risk by selling forward its expected production (hedged). To illustrate these scenarios, one must understand the nature of hedging and the foreign exchange markets. Hedging involves entering into financial transactions to protect against investment risks, such as currency risk from fluctuating exchange rates. Specifically, in the case of hedging against currency risk for a contract valued in euros, a firm can pay a fee to guarantee a certain exchange rate one year from now, irrespective of market volatility. This ensures a predictable profit and protects against potential losses due to currency devaluation. Without hedging, profits depend on the unpredictable future spot price and can result in either higher profits or losses. Visual representation of these scenarios typically consists of two graphs, one for the unhedged position showing profits with a wider range of outcomes, and another for the hedged position where profits are fixed at a predetermined level, minus the cost of hedging.