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Former Member
May 15, 2010 at 07:06 AM

Forward contracts

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Forward contracts are booked on the basis of confirmed orders placed on the foreign vendor. These

contracts are booked for currency fluctuations. With these contracts we can fix our liability in INR.

For example: If we have raised one PO in favour of foreign vendor (ESAB) for GBP 100,000 we will book

a forward contract for same amount (GBP 100,000) at current rate (GBP/INR). We book these contracts

if we feel the current rate is reasonable and there are chances that in near future the rate will go up. If we

feel the rate will go down in near future we will wait for opportunity to book the contract at low price.

For booking forward contracts bank is charging premium which will depend on the market conditions.

Normally bank charges 1.3% to 1.5% premium (on spot rate) for one year to book the forward contracts. In

short we our forward rate will be a combination of spot rate & premium. For example : If we will book

contract for GBP 100,000 on 1.4.2010 and spot rate (Market rate of GBP on 1.4.10) is 68.00 and premium

in 1.5% on Spot rate my forward rate will be Spot Rate 68.00 + Premium 1.02 = INR 69.02

Cancellation of Contract : At the time of expiry of contract if we will not utilize the contract, we have to pay

the difference to the bank if the forward rate is lower than the spot rate (on the date of expiry). Similarly the

bank will pay you the difference if the spot rate is lower than our forward rate. For example:

Contract Date Expiry Date Amount of GBP Forward Rate Spot Rate on Expiry Profit / (Loss)

1.4.2010 31.3.2011 100,000 69.02 66.02 (300,000)

In the above example our forward rate is INR 69.02 and if the spot rate of GBP on 31.3.11 is INR 66.02 the

bank will recover INR 300,000 from us by debiting our bank account on expiry date.

Reversal of premium: At the time of booking contract the bank charges the premium amount for the entire

tenure of the contract. If we will utilize the contract in between the bank will pay the unutilized premium.

For example: If our premium on GBP for one year is INR 1.02 and we will utilize the contract within 2 month

bank will repay us the premium for 10 months. While calculating the unutilized premium amount the bank

will take current premium rate.

any idea on this requirement please give the documents

Regards

Kari