I did not say it was not a "simple exercise" in natural isomorphisms, but simple is a relative term, and the concept of "natural isomorphisms" themselves, i.e. functors, are not as basic as most of what we see here. Actually probably no exercise in functorial isomorphism is simple, or at least not brief, but they all do follow the same pattern.
Well, actually I see that your problem is with the one aspect of the problem that is genuinely confusing, i.e. the fact that it is not true, since the gadget is neither covariant nor contravariant in both variables. but i will indulge myself with some explanation anyway. please forgive me.
The fundamental rule to show things are isomorphic is to write down the most obvious map you can. then see if it is an isomorphism. after that the naturality part is usually automatic, if confusing.
As my superb teacher put it: "Write down the only map you can think of. If that isn't it, it takes a genius to come up with one. Then check that when you change spaces you get maps, and everything commutes. [thats naturality]. To show it is an isomorphism, try to write down a map in the other direction and do it all again, and show the two maps are inverses."
so here, we write down the obvious bilinear map V*xW-->Hom(V,W) taking (f,y) to the map taking x to f(x)y. This is bilinear hence induces a map V*tensW-->Hom(V,W). so we wrote down the most obvious maps.
Now to show it is an ismorphism is impossible unless we use some properties of finite dimensional spaces, and the most powerful one is the existence of bases, and the theory of dimension. I.e. there is not going to be a really natural map in the other direction. But for instance, both those spaces have the same dimension, so this map is an isomorphism if and only if it is surjective, or injective.
a basis for the target space is given by the maps g(i,j) taking xi to yj and all other xk to zero, where {xi} and {yj} are bases of V,W resp. (These are Hurkyl's matrices, having a 1 in only one entry.)
So try to show some element maps to this map g(i,j). Well, these things are always either trivial or impossible as my teacher said, so let's just close out eyes and write down the simplest possible element of V*tensW we can think of that involves xi and yj. hey, how about xi*(tens)yj? where xi* is the map taking xi to 1, and all other xk to zero.
Then the image map is the one taking w to xi*(w).yj, in particular taking xi to yj, and every other xk to 0.yj = 0. seems good. so the map is onto hence isom. now we have checked it is an isomorphism in finite dimensions.
i realize you had no trouble with any of this.
now for the naturality part. this part has nothing to do with the finite dimensionality. this part is the "simple exercise" in natural maps.
so what happens if we "change spaces"? i.e. take any map f:V-->V'. then we get a natural map from V'*-->V*, and hence V'*(tens)W -->V*(tens)W, and a natural map Hom(V',W)-->Hom(V,W). Is that ok so far?
so we have checked that "when you change spaces, you get maps."
then these compose somehow or other. i.e. I guess we can compose
V'*(tens)W -->V*(tens)W-->Hom(V,W), and also
V'*(tens)W -->Hom(V',W)-->Hom(V,W).
the simple exercise is to check these two compositions are equal. i.e. we check that when you change spaces and get maps, that "everything commutes."
let me try one not to be overly cavalier: say we start from the element
g(tens)w in V'*(tens)W, which goes to (gof)(tens)w in V*(tens)W.
Then it goes to the map taking v in V to g(f(v)).w.
Now in the other composition, we send g(tens)w to the map taking v' in V' to g(v').w, then to the map taking v in V to the image of f(v), i.e. sending v to
g(f(v)).w. this is the same result! (It always is in my experience. I.e. in this subject either it always checks out trivially like this, or you get stuck somewhere. It seldom comes out wrong.)
Now I suspect you had no trouble with this either and that your only question was the very valid one: "in what sense are these two guys functors of V?" and I say they are in fact not.
I.e. I say just do the exercise as a natural transformation of a pair of functors of two variables, with opposite variance in the two variables.
Of course that means you have to do the space - changing thing again by changing W instead of V.
And then if you look at it maybe, just maybe, you can interpret it somehow as a process of changing both spaces at once, but i doubt it in any meaningful sense.
Forgive me Hurkyl, I'm tired of matrices at the moment. As the great Emil Artin once wrote [roughly, in his book, Geometric Algebra]: "linear algebra should always be done insofar as possible without mentioning matrices. Proofs with matrices generally take twice as much space as those obtained by throwing the matrices out. Of course sometimes they cannot be dispensed with, e.g. one may need to compute a determinant."
Of course you weren't really using matrices, just the word "matrix", but any construction that requires the maps to be invertible is seldom "natural" in the sense of categories.