Murray Electric has agreed to buy precision lathes from Germany and is worried a

Question

Murray Electric has agreed to buy precision lathes from Germany and is worried about the dollar/euro exchange rate. The total invoice amount is €800,000 to be paid in 6 months when the lathes are delivered. CrownJet has agreed to sell a 20-seater jet to a soccer team in France and is worried about the dollar/euro exchange rate. CrownJet is expecting to receive €800,000 in 6 months when the plane is delivered. Murray and CrownJet enter into the forward contract expiring 6 months from now. The $/€ spot exchange rate is 1.10. The forward rate is $1.12/€. Murray Elec goes long. CrownJet goes short. The contract is cash settled.

It is the expiry date. The spot exchange rate is $/€ 1.06. On the expiry date:

A. Murray pays CrownJet $32,000

B. CrownJet pays Murray €32,000

C. Murray pays CrownJet €48,000

D. CrownJet pays Murray $48,000

E. Murray pays CrownJet $48,000

Explanation / Answer

Now Murray Electric has to pay =$1.12*80000 =$896000

While the actual value owould be =$848000

Loss for murray would be = $896000-$848000

= $48000

Hence Murray pays CrownJet $48,000

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