Spot exchange rate and forward rate

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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

Reference no: EM131339058

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