FORWARD CONTRACTS

What is Forward ContractForward forex contracts are over the counter contracts entered with customers to deliver or to receive fixed amount of foreign exchange at any particular date in future or over a period in future. They are entered by customers with a view to hedge their forex receivables or payables

Merchant Forward ContractsExporters and Importers want to get themselves hedged from the adverse effects of any exchange rate fluctuations and hence may prefer to book forward contracts. ADs can book forward contracts after being satisfied about the genuineness of the underlying..

Who Can Book Forward Contracts ?Persons Resident in India

Persons resident outside India

Authorized Dealers Category I ( AD Category I)

BOOKING OF FORWARD CONTRACTS BY RESIDENTS IN INDIA Forward Contracts can be booked on the basis of the following Contracted ExposuresProbable Exposures based on Past Performance Special Dispensation

Contracted ExposureAD Category I banks to evidence the underlying exposure and should be satisfied about the genuineness.15 days time is allowed to the customer for production of documents , if they are not submitted at the time of booking of the contracts.The maturity of the hedge should not exceed the maturity of the underlying. The currency of hedge is left to the customer. The amount can be booked on reasonable estimates where the exact amount is not ascertainable.

Contracted Exposure(cont.)Forward contracts, involving the Rupee as one of the currencies, booked by residents to hedge current account transactions, regardless of the tenor, may be allowed to be cancelled and rebooked unless the corporate has submitted the exposure information as prescribed in Annex 1B.However this relaxation will not be available to forward contracts booked on past performance basis without documents as also forward contracts booked to hedge transactions denominated (or indexed) in foreign currency but settled in INR.

Probable Exposures based on Past PerformanceExporter : To hedge currency risk on the basis of a declaration of an exposure and based on past performance upto the average of the previous three financial years actual export turnover or the previous year actual export turnover, whichever is higher.Importer : Eligible limit is computed as 50% of the average of the previous 3 financial yrs actual import turnover or the previous yrs actual importimport turnover whichever is higher.

Cancellation Under Past PerformanceContracts booked up to 75% of eligible limit may be cancelled with the exporter/importer bearing/being entitled to loss or gain as the case may be.Contracts in excess of 75% of eligible limit shall be on deliverable basis and cannot be cancelled implying customer will have to bear loss but will not be entitled to profit.

Special Dispensation

The following categories are permitted to book forward contracts under Special Dispensation

Small and Medium Enterprises ( SMEs).

Resident Individuals.

Special Dispensation(cont.)

SMEs : - Permitted to book Forward Foreign Exchange Contracts without production of underlying documents for hedging their direct/indirect exposure to foreign exchange risk. These contracts can be booked/cancelled/rebooked/rollover without production of any underlying subject to following:Limits should be in line with the credit facilities availed by them for their foreign exchange requirements.AD should carry out due diligence and user appropriateness and suitability of FC to the SMEThe SMEs availing this facility should furnish a declaration to the AD Category I bank regarding the amounts of forward contracts already booked, if any, with other AD Category I banks under this facility.

Special Dispensation(cont)

Resident IndividualsTo hedge their foreign exchange exposure arising out of actual or anticipated remittances, both inward and outward , can book forward contracts , without production of underlying documents , up to a limit of USD 100,000 , based on self declaration . The contracts booked under this facility would normally be on deliverable basis and booked upto a tenor of 1 year only.In case of mismatches of cash flows or other exigencies, these contracts be cancelled and rebooked.

Persons resident outside IndiaForeign Institutional Investors (FIIs) Persons having Foreign Direct Investment in India Non-resident Indians (NRIs)

Authorised Dealers Category - IManagement of Assets and Liabilities Hedging of Gold Price Risk Hedging of currency risk on Capital

Merchant Forward ContractsFixed Date Contract Foreign Exchange to be delivered at a fixed future dateOption forward Contract Foreign Exchange to be delivered during a specified future period not exceeding one month

Dates of deliveryIn case of option forward contracts, currency to be delivered as and when demanded by the customer, of course, within the prefixed 1st and last option period date

UtilisationContracts are firm and delivery has to be taken on maturity date. However, certain relaxations are Part utilisation of ContractSubstitution of ContractHigher amount of foreign currency than originally contracted

How forward rates calculated and quotedTake an appropriate spot rateArrive at the base rate at which the cover transaction can be undertaken in the marketAdd/deduct forward premium/ discountAdd/deduct profit margin to the base rate and round it off as permitted under FEDAI rules

CANCELATION OF FORWARD CONTRACTForward Contract can be cancelled on or before maturity at the request of the customer and the consequent profit or loss will be passed on to the customer. In case the contract remains unutilized the bank will cancel the contract on 7th working day after the expiry of the contract when no profit will be passed on to the customer but the loss, if any, will be recovered.

EARLY DELIVERY In case the currency is delivered before the contracted date for exporters, the forward contract can be utilised by paying the premium for the remaining period in case of exports and vice versa in case of imports. Interest on outlay of funds if any, will be charged.

Booking & Cancellation Charges of Forward Contracts Booking Charges Bank Charges INR 500Cancellation Charge INR 500

Cancellation Charges INR 500 (+or-) Swap cost

Sources

RBI MASTER CIRCULAR NO. 5/2013-14 DATED 01 JULY 2014

Latest FEDAI Guidelines

BANK OF INDIA, TREASURY BRANCH

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