2.16. On July 1, 2013, a Japanese company enters into a forward contract to buy $1 million with yen on January 1, 2014. On September 1, 2013, it enters into a forward contract to sell $1 million on January 1, 2014. Describe the profit or loss the company will make in dollars as a function of the forward exchange rates on July 1, 2013, and September 1, 2013.

The total payoff is given as million yen where and are the forward exchange rates of contract made on July 1, 2013 and September 1, 2013 respectively.

Explanation:

Suppose the forward  exchange rates for the contrat are given as

Now the spot exchange rate on January 1, 2014 is given as  in yen per dollar.

So the net payoff from the first contract is given as

million yen

So the net payoff from the second contract is given as

million yen

So the total payoff is given as

So the total payoff is given as million yen where and are the forward exchange rates of contract made on July 1, 2013 and September 1, 2013 respectively.

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