Forward Exchange Contracts

Transcription

1 Forward Exchange Contracts

2 Forward exchange contracts Contract amount Parties Rate Place of delivery Mode of delivery Salient features of a forward contract Exchange control aspects Credit Risk/exposure Booking of a contract Rate fixation under forward exchange contracts

3 Fixed date forwards Option date forwards Early delivery Extension of forward contracts Forward purchase contract Forward sale contract Forward contracts-roll over Cancellation of forward contracts

4 When an import or an export is made and it is denominated in foreign currency, the entity exposes itself to a foreign currency risk. This risk is critical and to safeguard against it, the entity fixes the rate of the foreign currency at a future date. This is known as a forward exchange contract.

5 A forward exchange contract can be defined as a contract entered into by the bank with its customer (or another bank) for an exchange transaction to be put though at some future date at an agreed rate of exchange. Under this contract the rate of exchange is fixed for the foreign exchange transaction transaction that will happen in a future date.

6 The contract must be for a fixed and definite amount. There must be two parties one of whom is a bank. The rate at which the contract is concluded must be mentioned. The place where delivery would be made should be identified. The mode of delivery should be mentioned

7 The contract must be fixed and definite amount

8 There must be two parties one of whom is bank

9 The rate at which the contract is concluded must be mentioned

10 It is assumed that the foreign exchange will be delivered or paid for at the bank at the place identified

11 The manner foreign exchange will be delivered or paid for at the bank at the place identified

12 Exchange rates fixed today. Currencies change hands in future Maturity can be a fixed date or any date within a specified period. The contracted rate is binding. If last day of maturity is a Sunday or holiday, the contract matures on preceding day There is no provision for excess delivery in the forward exchange contract.

13 It must be ensured that the booking is in accordance with exchange control regulations in force.

14 The bank runs a risk in case the customer does not honour his commitment Therefore the bank would prior to booking the contract assess the other party s capacity to take or give delivery

15 Contract should be booked on the basis of a letter of credit or an order. The contract should be booked in the currency of the letter of credit or order.

16 The rate fixed is an outright forward quotation inclusive of premium or discount. The outright transaction is a single forwartd transaction. The outright transaction can be a hedge.

17 If foreign exchange is to be delivered at a fixed date it is known as a fixed date contract. They are ideal for hedging certain future cash flows.

18 Option dated forwards allow the buyer to buy or sell a currency for delivery during a specified period in future or at any time during the option period. It is the buyer s option when delivery should take place. At the time the contract is entered into the first and last date for delivering the foreign exchange should be stated and this is fixed. The option period is usually one month

19 It is the option of the bank to accept or give early delivery. When the bank decides to accept or to give early delivery, it recovers/ pays the swap difference.

20 The bank may extend the forward exchange contract provided the customer agrees to bear the cost of arranging a swap and the interest on outlay of funds if any. The extension of a forward contract is at the bank s option. It cab be extended at any time prior to, during or after the delivery period stipulated in the contract.

21 Swap Buy spot, sell forward or sell forward buy forward Currency at premium Swap to be paid to customer if in favour of the bank Currency at discount Swap cost to be collected by bank if swap against bank

22 Swap Sell spot, buy forward or sell forward buy forward Currency at premium Swap will be against bank and changes recovered from client Currency at discount Swap will favour bank and must be paid to customer

23 This is a contract where the forward exchange contract is initially booked for the total amount to be repaid. As and when installments fall overdue, it is paid by the customer in foreign currency at the rate fixed in the contract. The balance of the contract is rolled over till the due date of the next installment. This continues till the entire liability is repaid.

24 The customer pays the cost of the extension. This protects customers from adverse movements of foreign exchange

25 Forward contracts are cancelled By banks by recovering the difference between the rate fixed under the contract and the TT rate on the date of cancellation.

26 Forward exchange rates are entered into to safeguard against the fluctuation of the foreign currency hat has to be bought/ sold At time of contract the amount of foreign exchange, the rate and time of delivery must be stated. Delivery can be on a fixed date or at the customer s option. At maturity options available are to take delivery or at the customer s option.