Underlying (purchase order) is not mandatory for booking forward contracts up to USD 10 million

by | Feb 21, 2024

forward contract

Forward Contract Meaning: 

A forward contract is a contract between the bank and its customer to buy or sell a specific currency at a specified future price for delivery on a specified future day beyond the Spot Date. 

 

Period of Delivery: 

 A contract can be booked for a future fixed date of delivery or can have a window period of delivery where the contract must state the first & last date of delivery. The window period should be specified by the customer in such a way that the last date of delivery shall not exceed 1 month.

For Example: 19th Apr 2023 to 18th Mar 2023 & 31st Jan 2023 to 28th Feb 2023

 

Delivery in case of Holiday: 

If the fixed date of delivery or the last date of delivery is a known holiday (which is known at least 3 working days before the date) the last date for delivery should become the preceding working day. In case of suddenly declared holidays, the contract shall be deliverable on the next working day

For Foreign Exchange business, Saturday will not be treated as a working day

 

Early delivery: 

Yes, a forward contract can be utilized before its utilization period starts. In this case, the bank can recover or pay the swap difference. The bank also recovers the Interest on outlay and inflow of funds for such swaps.

 

Extension of forward contract:

In an extension of the forward contract, the earlier contract is cancelled at the current selling or buying rate and rebooked simultaneously at the current market rate. The difference between the earlier booked rate and the rate at which the contract is cancelled is recovered or paid to the customer.

 

Recovery/ Payment of Loss /Gain:

 In case of cancellation of a contract at the request of a customer and if the request is made on or before the maturity date the bank recovers the loss or passes on the profit, the actual difference between the booked rate and the rate at which the cancellation is affected.

In the absence of any instructions from the customer, a contract which has been matured is cancelled by the bank within the 3 working days after the date of maturity

Please note that if a contract is cancelled after the maturity date, the bank is not liable to pass on the profit on the contract, if any, but the loss incurred in the contract shall be recovered from the customer.

 

Different Schemes of Hedging of Foreign Currency Exposure through forward contracts? 

There are two types of exposures under which hedging can be done i.e. Contracted & Anticipated, all existing facilities such as Past Performance, Simplifies hedging, and Self-declaration have been withdrawn with effect from 01 September 2020 by RBI vide its master direction RBI/FMRD/2016-17/31 updated on 01.09.202.

What is contracted exposure?

It is an exposure to the exchange rate of the Indian Rupee against a foreign currency on account of current and capital account transactions permissible under FEMA, which have already been entered into. For Example, if an exporter has already received a purchase order and agreed to supply goods against it, then booking a forward contract against the same order is called contracted exposure.

What is anticipated exposure?

Exposure to the exchange rate of the Indian Rupee against a foreign currency on account of current and capital account transactions permissible under FEMA, which are expected to be entered into the future. For Example, if an exporter expects that he will receive a purchase order of at least 1 million dollars every month based on his experience and prospects, then booking a forward contract for such future exposures is called anticipated exposure.

 

 

What is the difference between contracted exposure and anticipated exposure for hedging foreign currency exposure by resident Indians?

 

Contracted Exposure Anticipated Exposure
  • Exposure is hedged based on the contractual exposure which already exists
  • Exposure is hedged based on the exposure which is anticipated in future.
  • Proof of underlying exposure is not required for booking forward contracts up to USD 10 Million or its equivalent, however, the bank can demand the same whenever is required
  • Proof of underlying exposure is not required for booking forward contracts up to USD 10 Million its equivalent
  • Application & Forward Booking confirmation to be submitted to AD Bank within 15 calendar days through digital/ physical mode
  • Application & Forward Booking confirmation to be submitted to AD Bank within 15 working days through digital/ physical mode
  • Can be rebooked or cancellation
  • Can be rebooked or cancelled
  • Profit or loss fully passed or recovered 
  • Losses are recovered upfront however profit is withheld & passed to the customer after submission of necessary documentation proof of Cash Flow.

Authorised Dealers may, in exceptional cases, pass on the net gains on contracts booked to hedge an anticipated exposure whose underlying cash flow has not materialised, provided it is satisfied that the absence of cash flow is on account of factors which are beyond the control of the user
  • The notional and tenor of the contract should not exceed the value and tenor of the exposure.
  • The notional and tenor of the contract should not exceed the value and tenor of the exposure.
  • If outstanding notional increasing USD 10 mio in the same FY underlying documents are required for fresh booking as well as for existing outstanding contracts
  • If outstanding notional increasing USD 10 mio in the same FY, evidence of cash flows on a contract basis is required for all outstanding contracts 
  • The same exposure should not be hedged using any other derivative contract.
  • The same exposure has not to be hedged using any other derivative contract.

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