Import Auto has agreed to buy cars for 2,000,000 from Germany. The total invoice is to be paid in 6 months when the cars are delivered. Import Jet of Ohio has agreed to sell a jet for 2,000,000 to a buyer in France. Import Jet will receive the payment in 6 months when the plane is delivered. Both companies are worried about the dollar/euro exchange rate. Import Auto and Import Jet enter into the forward contract expiring 6 months from now. The $/ spot exchange rate is 1.13. The forward rate is $1.11/. Import Auto goes long. Import Jet goes short. The contract is cash settled.

It is the expiry date. The spot exchange rate is $/ 1.17. On the expiry date:

Import Jet pays Import Auto 80,000

Import Auto pays Import Jet 40,000

Import Jet pays Import Auto $120,000

Import Auto pays Import Jet $40,000

Import Auto pays Import Jet $120,000