Murray Foods has agreed to buy schnitzel makers from Germany. The total invoice amount is €1,000,000 to be paid in 6 months when the machines are delivered. CrownJet has agreed to sell a jet to a frog farmer in France. CrownJet is expecting to receive €1,000,000 in 6 months when the plane is delivered. Both companies are worried about the dollar/euro exchange rate. Murray and CrownJet enter into the forward contract expiring 6 months from now. The $/€ spot exchange rate is 1.12. The forward rate is $1.10/€. Murray Foods goes long. CrownJet goes short. The contract is cash settled.
It is the expiry date. The spot exchange rate is $/€ 1.17. On the expiry date:
CrownJet pays Murray €50,000
Murray pays CrownJet €20,000
CrownJet pays Murray $70,000
Murray pays CrownJet $20,000
Murray pays CrownJet $70,000