Importance of International Finance :-Intl trade has a great importance for our standard of living.

When we go to big departmental stores/shopping malls we find electronic items from Japan , Whisky from Scotland, Watches from Swit erland, wine from !rance and on the roads we find automobiles from "ermany,#orea,$S,%heckoslovakia,and "reat &ritain. 'he network of payments ( the International investments have become so fast that any event occurring anywhere in the world reaches to the world within moments whether it is change in oil prices , "old prices, )lection results or outbreak of war or establishment of peace. *ll these things have made it compulsory for every actual ( prospective manager take a good look into the e+citing and dynamic field of International !inance. Foreign Exchange Sources & Uses : A. Sources of External Finance :- 'he main sources of e+ternal !inance for the developing countries could be classified on the following broad heads ,I. &ilateral *id II. .ultilateral agencies like the I.!, World &ank ( *sian /evelopment &ank. III. )+port %redit offered by the Industrial %ountries to finance e+port of %apital "oods to the developing world. IV. %ommercial .arkets. V. .iscellaneous Sources 0 1ike /omestic markets of different countries and the )uro or 2ffshore markets. 1.Official e!elopment Assistance : - 'his comprises both bilateral aid and assistance provided through replenishment of resources of multilateral soft 0 lending agencies like I/*3International /evelopment *ssociation4 , funds of regional development banks, $5 etc. Some of this assistance comes in the form of grants as well. ".#ultilateral Agencies: $ommercial %erms e&t :- 'hough the loans from agencies like world &ank or 'he *sian /evelopment bank are considered to be concessional and cheaper but these banks lend at about 6 7 above their average borrowing cost ..ost of these are for financing big pro8ects wherein global tenders have to be called by the borrowing country. 'hese loans are guaranteed by the government of the borrowing country. 5ow days world bank also invites commercial banks to participate in financing specific pro8ects. 'he International !inance %orporation Washington is the only multilateral agency for the private sector .It gives both floating as well as fi+ed rate loans. 'he International .onetary !und is the only institution providing loans not only for development pro8ects but also for &29 difficulties facing countries. '.Export $re(its ,- 'he ob8ective of starting the scheme of )+port %redit Schemes was to help e+porters particularly of %apital "oods, to e+tend credit to the buyers and promote e+ports. /ue to unhealthy competition among different countries 0 at the initiative of $S a consensus was arrived at governing sub8ects as interest rates, period of credit, moratorium 3in case of turnkey pro8ects4 and other repayment terms. 'he rate of interest is normally linked to 1ondon Interbank 2ffered :ate31I&2:4. Suppliers $re(it : - under suppliers credit the e+porters supplier e+tends a credit to the buyer Importer of %apital goods . "enerally the terms are ;< to =< percent down payment and the balance payable in ;< e>ual half yearly installments. 'o provide the suppliers credit the e+porter normally obtained a loan from his banker which is covered by e+port credit insurers in the country. )u*ers $re(it :- In this case the buyer importer raises a loan from a bank in the e+porters country under the e+port credit scheme in force ( terms confirming to the e+port credit scheme in force. 'his is also covered under e+port credit scheme. 'he )?I. bank provides the facility and also provides line of credit to promote e+ports of capital "oods.

#iscellaneous Sources ,- F$+, (eposits - 'o provide 9re Shipment in foreign %urrency or to rediscount e+port bills. Short %erm $re(its :- %redit from the supplier up to ;@< days from shipment date at rates prescribed by :&I.. Forfaiting,- is the purchase of medium term claims of an e+porter on the foreign buyer without recourse to the e+porter. 'his is a commercial source of finance and no cost such as insurance etc. is involved . EXCHANGE ARITHMATIC & EXCHANGE RATES 5atural resources are not evenly distributed across the globe .What is available in plenty in one country is scarce in another. 'his was the genesis of the "lobal 'rade. Initially the trading terms were only barter, With traded items becoming more numerous and comple+ with the passage of centuries terms of trade shifted to more acceptable and universal store of value vi currency, 'his was the genesis of fore+ market. *n importer of goods and services in Japan would like to asses his profits in terms of Japanese Aen whereas an )+porter in India would like to calculate the same in India :upees. 2ut of this demand and supply dynamics emerges parity between the two currencies. 2f course this is a very broad term and various other factors contribute to a currencys e+change value in terms of another currency such as inflation, interest rates etc are some of the factors that impact e+change rates. )+change rate means the method of conversion of one currency into another. In such conversions !oreign %urrency is always treated like a commodity and the home currency as purchasing power. In other words the rate at which one currency is converted into another currency is called the e+change rate .'he e+change rate can be >uoted in two ways ,1. In(irect metho(: - * given no. of units of foreign currency per given units of local currency e.g. :upees ;<</- B $S/ =.;CDE In India was the practice to use the indirect method of >uotation till ;CCF.Gowever wef <=.<@.;CCF direct >uotations are being used. ". irect #etho(: * given no of units of local currency per unit of foreign currency e.g. $S/ ; B :s.HE.EF<<. Purchase & Sale ,- it is important to have a very clear idea about 9urchase and sale transactions and hoe they arise. !rom the *uthori ed /ealers 3*/s or &anks authori ed to deal in !oreign )+change4 point of view conversion of foreign currency on behalf of an e+porter into Indian :upees would involve a purchase and conversion of domestic currency into foreign currency on behalf of an importer would be a sale. 1ikewise outward remittances will involve sale of foreign currency while inward remittance would involve purchase of foreign currency. 9urchase and sale off currencies are not effected at the same rate .* dealer in foreign e+change like any other trader would like to make profit from the differentials. *s direct >uotations are in use now in India the ma+im applied is &$A 12W I S)11 GI"G 2: "IJ) 1)SS I '*#) .2:) CROSS RATES ,In case the price of one currency is not >uoted against the other currency the parity between them is obtained by using an intermediary currency. 'he rate thus obtained is called a cross currency rate and the principal applied for obtaining the cross rate is called the chain rule. !or e+ample in the Indian market the $S/ is >uoted at $S/ ; B :s.HD.=;<</HD.=F<< In case the )uro is >uoted in 5ew Aork as )$: ;B $S/ ;.;;E</;.;;EE )$: ;BK :s. &uying :ate, If )$: ;B $S/ ;.;;E< and $S/ ; B:s.HD.=;<< 'he answer would be )$: ;B ;.;;E<+ HD.=;<< B E;.E=<< Selling :ate, If )$: ;B $S/ ;.;;EE and $S/ ; B HD.=F<< the answer would be )$: ; B ;.;;EE+ HD.=F<< B E;.ED<<

PURCHASE and SALE Transactions . ,- *ll purchase /sale transactions are not alike and hence attract different rates. 'o illustrate, both outward remittance and payment of an import bill are sale transaction but work involved for the authori ed dealer 3&ank4 in the two cases is not the same .In the first case the matter is relatively simple as he merely recovers the e>uivalent rupee amount and issues a remittance by way of ''//emand /raft/mail 'ransfer. In case of import bill the work involved is not simple. 'he bill has to be scrutini ed, acknowledged, and presented to the drawees. !ollow up has to be done regarding payment and correspondence with the foreign bank. 9apers have to be kept properly and safely and track of arrival of goods to be kept .'hus the work involved is much more as compared to a simple remittance. &anks would therefore like to be compensated for the additional work. 'his can be done by selling the currency a little costlier to the importer as compared to the rate for the simple transactions. 'hus other things being e>ual there would be two selling rates the first called the '' selling rate3''S4 and the second &ill Selling rate 3&1S4.!or the reasons e+plained earlier the e+change rate >uoted for an e+port bill will be worse than one >uoted for an inward remittance . 'here are two important aspects in a transactions involving sale or purchase of foreign currency 3i4 rate for conversion and 3ii4 date of delivery i.e. the date on which a transaction is to be completed. &anks normally come across different types of customer transactions 0 when bank agrees to sell foreign e+change to one of its customers either the bank should have a purchase transaction from another customer or he will buy from another bank in the market. 'hus the bank while ac>uiring the foreign e+change from the market at market selling rate will charge the customer on the market selling rate. 2n the other hand if a customer is offering to sell foreign e+change to the bank , bank should see the rate at which market will be buying foreign currency. 'hus the market rates form the basis for banks for >uoting the rates to the customers. &anks have to work out buying and selling rates on the basis of a base rate which may be derived from the ongoing market rate. 2nce the bank has arrived at his base rate he marks it up to cover margin and profit. &anks in India are free to load e+change margins in their discretion for the transactions sub8ect to compliance of ma+imum spreads and other provisions relating to calculation of e+change rates. A lication o! e"chan#e rates ,;. Selling ,ates ,A. %% Selling rates a. 2utward remittance in foreign currency Spread .;=E7 to .;E<7 b.%ancellation of a purchase e.g. i4 &ill purchased returned unpaid ii4 &ill purchased transfer to collection */%. iii4 :eturn of an inward remittance refunded to remitting bank. c. * forward purchase contract cancelled. ). )ill selling rates 'ransaction involving transfer of proceeds Spread .<=E7 to .<@<7 of import bills whether on collection or under 1/c. =. has Spread .<=E7 to .<@<7 already been credited to banks 5ostro account. b. conversion of proceeds of instruments Sent for collection. c. cancellation of outward ''/.'/92/// . d. cancellation of !orward sale contract. ). )ill )u*ing ,ates a. 9urchase/discounting of bills and other i instruments. )u*ing ,ates ,A. %% )u*ing rates a. %lean inward remittances i.e./''/.'/// for which cover

Spread .;=E7 to .;E<7 For.ar( ,ates :!orward rates for a given commodity or security may not necessarily be e>ual to the ready/spot rate. 'his is so because the anticipated demand/ supply and cost situation on a future date may not be the same. * commodity could be >uoted at a higher 39remium4 or a lower 3discount4 rate for future deliveries. 'he same situation holds good in foreign e+change transactions and forward rates would more often be at premium or at a discount rate as compared to spot rate. In a free market the rates will be based on the demand ( supply situation . * currency in e+cess supply would tend to become cheaper and a scarce one would be costlier till a balance between the demand and supply is struck. &esides given connection between e+change rates and funds cost in totally free market the premium/discount on forwards would tend to e>ual the difference in interest rates in the two currencies. Example *ssuming that the following rates are available in the market and there are no e+change control or restriction on transfer of funds )$:2 interest rate =.=E7 p.a. $S /ollars interest rate ;.=E7 p.a. Spot rate )$: ; B $S/ ;.;;E< ;= months forward *t par i.e. no premium no discount. In this rate structure one would borrow $S/ say million and convert the same to )$:2 L ;.;;E< i.e. )$: H,H@H,F<E.<< invest the amount for ;= months and buy $S/ ;= months forward for )$: at the e+change rate of .;;E<. 'he )$:2 amount invested would yield a return of =.=E7 p.a. against ;.=E7 p.a. cost of the $S/ loan or a clear profit of ;7 p.a. with no currency risk. 'here will be several operators in the market doing e+actly the same calculations and trying to take the advantage when a rate situation is like this is noticed. 'his will lead to ;. *n increase in demand of $S/ borrowing for ; year. =. an increase in spot )$:/$S/ demand F. *n increase in ; Aear )$: for deposit. H. *n increase in demand for ; year forward $S/ . Since the market rates are governed by demand and supply situation this will ;. harden the $S/ interest rates. =. harden the spot )$: buying rate. F. Soften the )$: interest rates. H. Garden the forward $S/ &uying rate. 'his trend will continue till an e>uilibrium is established between )$: ( $S/ and the arbitrage opportunity would no longer e+ist. *part from the interest rate differential there are other factors like the demand and supply situation on a future date, sudden movements of capital, activities of speculators, restrictions on e+change and money market operations. *ctions of the central banks etc that influence forward margins. Ris$s in %orei#n E"chan#e &usiness ,- !oreign e+change business has become increasingly important for &anks as a source of profit. 'raditional lending business has become less attractive from the profitability angle because of large cash ( statutory li>uidity re>uired to be maintained besides several sectors of the economy considered important from the socio economic policy angle, banks are re>uired to lend at interest rates below the cost of funds. !oreign e+change business generates trading profits as well as fee 3commission4 income. In the case of foreign e+change trading the risks can be classified under the following ma8or heads ,;. 'he open position :isk ,- )+change control regulations in India re>uires the banks to maintain at the close of every working day a s>uare position in currencies. In practice an absolutely s>uare positions are impossible to maintain 0 the aggregate customer transaction will rarely result into precise marketable lots . 'herefore some open position,

either overbought or oversold, is unavoidable in the very nature of foreign e+change operations. )+change control does not altogether prohibit the banks keeping the open positions during the course of day. 'hus depending on the policy of a bank, dealers may be allowed to take intra day positions in order to make profits. !or instance a dealer e+pecting the dollar to weaken during the day may deliberately take intra day position in the hope of s>uare it later during the day at a profit. !or market makers offering two way >uotes in the international markets open position are far more common otherwise they will cease to be market makers.. 'he risks arising out of the open positions are easy to understand. If one is overbought and the currency weakens one would be able to s>uare the position only at loss. 'he same would be the position if one is oversold and the currency hardens. Some of the measures commonly adopted by bank managements in order to limit the risks are as under a4 1imits on Intra /ay positions in each currency. b4 1imits on overnight open positions in each currency 0 'his will be lesser than 3a4 c4 * limit on aggregate open position for all the currencies taken together which will be less than the total of the currency wise limits. d4 * turnover limit on daily transaction volume for all currencies 0 this is more important for the banks active in market making. Mis'atched Maturities ,- Gere again some mismatching of maturities in general are unavoidable. !or e+ample a customer may be wanting an import forward contract to mature on odd date say ;F.<C.=<<D. In the Interbank market counterparty may not be available for the date in >uestion. It may therefore be necessary to cover this transaction in interbank market by making a contra transaction on a near date for which counterparty may be available. 1et us assume that the nearest date is say =E September. Since the bank will have to deliver the dollars to the customer value ;F.<C.=<<D while the contra contract matures only on =E.<C.=<<D the bank runs a risk of its account abroad becoming overdrawn during the intervening period resulting into loss in the transaction. *lternatively since the overdrafts are not welcomed the bank might undertake a SW*9 0 &uy for delivery ;F.<C.=<<D and sell for delivery =E.<C.=<<D. If the swap rates have moved against you a loss could result. Since the e+act matching of maturities in practice is not possible, it is customary to group maturities say month wise. In general the losses from mismatched maturities arise either because of adverse movements in interest rates or because of adverse movements in forward margins between the time mismatched position is created and until it is corrected. *s a measure of control on the risk arising out of mismatched maturities the following controls are used by the banks * monthly gap limit for each currency * cumulative gap limit for each currency which would be less than the total of the monthly gap limits. * cumulative gap limit for all the currencies taken together which in turn would be less than the aggregate of the currency wise gap limit Credit Ris$s ,- credit :isks are also very important in foreign e+change business . 'hse can arrive when a counter party a bank or a customer fails to meet his obligation resulting open position to be covered at the ongoing market rate. If the rates have moved against you resulting into a loss . !or e+ample if you have sold $S/ to a customer at :s.HE.E<, before the contract matures the customer fails and is unable to take the delivery of the dollars earmarked for him under the contract. 5ow you will have to go to the market and meanwhile the market has moved against you and you can sell the dollars at say HE.<< a loss would obviously result.'he situation will be the same even if the counterparty were to be a bank.

'he recent e+ample of a banks failure in the foreign e+change market is that if "lobal 'rust &ank or "'&. In that case most of the banks who had unmatured contracts with "'& suffered huge losses. *s a measure of controlling credit risks banks impose limits on customers as well as on other banks. separate limits are fi+ed for spot and forward transactions. 'he forward being lesser than the spot. *s far as the forwards are concerned the limits imposed generally prescribe the ma+imum level of the net outstanding forward contracts i.e. the difference between the outstanding forward sales and purchase contracts .'his is because the profit on sales will take care of losses on purchases or vice versa. Countr( ris$ ,- relates to the ability and willingness of a country to service its e+ternal liabilities. It is possible for the government and the borrowers of a particular country are unable to fulfill their foreign e+change liabilities due to reasons beyond their control. 'he government policies, 9olitical environment, socio economic conditions etc. have to be taken into consideration and a limit for that country should be fi+ed .*lso the rating awarded to the countries by the e+ternal agencies should be taken into consideration while fi+ing the limits. O)ertradin# Ris$ ,- * bank runs the risk of overtrading if the volume of transactions indulged by it is beyond its administrative and financial capacity. O erational Ris$s *+ counterparties of deals 'hese include the inadvertent mistakes in the rates amount and

%OREIGN EXCHANGE MAR,ETS

/eneral features of exchange mar0ets ,- !oreign )+change market is described as an 2'% 32ver 'he %ounter4 market as there is no physical place where the participants meet to e+ecute the deals. It is an arrangement between the participants i.e. &anks &rokers etc who are connected by means of communications such as tele+, SWI!', 'ele+, and 'elephone ( Gotlines. 'he leading !oreign )+change centers in India are .umbai, %alcutta, %hennai ( /elhi,*hmedabad and "oa are emerging new centers. !oreign )+change market is the largest financial market with a daily turnover of over F trillion $S /ollars. In India the daily turnover is about = &illion $S dollars. 'he markets are not situated at any one centre in the world but it is a =H hours open "lobal market due to different 'ime Mones. thus at any one point of time one market or the other is open. Some of the banks are having =H hours open /ealing :ooms to keep a watch on the developments in the market and gain advantage out of the same. /evelopments in the telecommunications have largely contributed to the foreign e+change markets as the participants are able to keep them abreast of current happenings in the markets by giving these players access to :euters and moneyline 'elerate etc..'his has made the foreign e+change market very efficient. 'he ma8or currency traded in the foreign e+change markets globally is $S/, though currencies like )$: ( Japanese yen are also gaining a good share . PARTICIPANTS , - 'he participants in the foreign e+change markets are a4 %orporates b4 %ommercial &anks c4 )+change &rokers d4 %entral &anks

1. $orporates :'he business houses, International Investors and multinational corporations may operate in the market to meet their genuine trade or investment re>uirements . 'hey may also buy or sell currencies with a view to speculate or trade in currencies to the e+tent permitted by e+change control guidelines. ".$ommercial )an0s ,- 'he ma8or players in the market are the commercial banks in any country. 'hey buy and sell currencies for their clients. 'hey may also operate on their own. 'he banks normally enter the market to cover the positions created by the client transactions. Gowever such cover transactions constitute only E7 of the transactions done by a large bank. * ma8or portion of their volume is accounted by trading in the currencies. .ost of the banks deal directly thru phone or :euter dealing system. '.Exchange )ro0ers ,- e+change brokers facilitate deals between banks. *ny bank entering into a transaction with the client has to contact other banks in the market to get the best >uotes for covering the transaction. If the number of the players in market is say ;E< then it is not possible for the banks to go to all and get the best >uote. Gere the e+change brokers help the banks to find the best deals . 1.$entral )an0s ,- may intervene in the market to influence the e+change rate so as to keep a check on the volatility in the foreign e+change market. 'o keep check the central bank may directly enter into the market .In India :&I normally does not interfere the market but if re>uired it operates thru State bank of India. Settlement of transactions ,- !oreign e+change markets make use of the latest developments in telecommunications for transmitting as well settling foreign e+change transactions. &anks use the e+clusive network SWI!' to communicate message and settle the transactions at electronic clearing houses such as %GI9S at 5ew Aork. SWI!' is a society formed by about =E< banks in )urope. 'he SWI!' provides the following advantages -;.provides reliable ( time tested method of sending and receiving messages. =. Instantaneous relay of messages .FF*ccess available to a large number of banks. H. Jery clear formats for different types of messages leaving no chance for ambiguity. Transactions in Inter&an$ Mar$et ,- 'he transactions in the interbank market may be settled as a4 %ash 'ransaction i.e. settlement of transaction the same day. b4 'om 'ransaction i.e. settlement of the transaction ne+t day. c4 Spot 'ransaction i.e. settlement two days later d4 !orward 'ransaction, - *ny date after spot date is called a forward date. If there is any holiday including Saturday ( Sunday the settlement will take place ne+t day.

%OR-AR. CONTRACTS !orward e+change contract is a device which provides ade>uate protection to an importer or e+porter against e+change risk. $nder a forward e+change contract a banker and a customer or another banker enter into a contract to buy or sell a fi+ed amount of foreign currency on a specified future date at a pre determined e+change rate. !orward contracts are of two types 0 ;. !i+ed date forward contracts ,'he forward contract under which the delievery of the currency shall take place on a specified future date is known as the fi+ed date forward contract. !or e+ample if a forward purchase contract for $S/ ;<<<<.<< is booked on <;.<D.=<<D for three months forward the due date will be F;.<@.=<<D . 'he currency can be delievered only on F;.<@.=<<D.it can not be picked prior to the due date. In real situation it is not possible for any e+porter to know in advance the e+act date on which he will be able to submit the e+port documents because there are many factors which decide when the shipment will take place and the documents will be completed.

'o eliminate the difficulty in fi+ing the e+act date of submission of documents the customer may be given a choice of a given period of days. *n arrangement by which a customer can sell or buy foreign e+change on any day during a given period of time at a predetermined rate of e+change is known as option forward e+change. !or e+ample if on =C.<D.=<<D a customer enters a two month forward the due date will be <;.<C.=<<D to F<.<C.=<<D.. 'his range of period is known as N2ption 9eriodO. :ules regarding option !orward %ontracts ;.'he option period of delivery should not e+ceed one month. )+amples of valid option period are <;.<P.=<<D to <P.<P.=<<D, <;.<@.=<<D to F<.<@.=<<D etc. =.&etween bank and customer the option is that of the customer so the bank can not force the customer to deliver foreign e+change on any specific date.it is upto the customer to choose any date within the option period. E"chan#e control Re#ulations,- &anks are re>uired to adhere to the !).* "uidelines before booking any forward contract a4 &anker should verify the documentary evidence and be satisfied about the genuineness of the underlying transactions. b4 'he maturity of the contract should not e+ceed the maturity of the underlying transactions. c4 'he currency of hedge and tenor are left to the choice of the customer. d4 Where the e+act amount of the underlying transaction is not ascertainable, the contract can be booked on the basis of a reasonabl estimate. e4 Substituition of the contracts for hedging trade transactions are permitted on being satisfied with the circumstances under which such substituition has become necessary. $alculation of fixe( for.ar( rates ,For.ar( )u*ing ,ates for $S/ I/& rate HD.;</HD.;= !wd 9remiums 8uly .;;/.;F,*ug .=F/.=E, September .FF/.FE /ate of contract F<.<C.=<<D, .argin .;E<7 /ollar/:upee market spot &uying :ate HD.;< *dd !orward premium for Sept =<<D .FF 2r 1ess !orward /iscount for the usance period 'otal HD.HF 1ess margin L.;E<7 .<P !orward &uying rate for $S/ as on F<.<C.=<<D HD.FD For.ar( Selling ,ates /ollar/:upee Spot selling rate HD.;= *dd forward premium for September =<<D .FE 2r deduct !orward /iscount 'otal HD.HP *dd margin L.;E<7 .<P 'otal HD.EH $alculation of Option For.ar( rates ,- $nder an option !orward contract the customer is at liberty to deliver the e+change on any day during the option period.'he &ank has to >uote a single rate valid for the full period. In the previous e+ample if the due date is <;.<C.=<<D to ;E.<C.=<<D the forward rates will be calculated as follows For.ar( option )u*ing rate /ollar/:upee Spot buying rate HD.;< *dd forward premium3upto *ugust4 .=F 2r less forward discount 'otal HD.FF 1ess margin .;E<7 .<P 'otal HD.=D For.ar( option Selling rate /ollar/:upee spot selling rate HD.;= *dd forward premium upto ;E.<C.=<<D .F< 2r 1ess /iscount 'otal HD.H= *dd .argin .;E<7 .<P

'otal E"ecution o! %or/ard Contract

HD.HC ,-

!orward %ontract /elivery %ancellation )+tension

2n /ue /ate )*:1A 1*') eli!er* on (ue (ate ,- When the delivery is taken on due date the rate applied for the transaction would be the rate originally agreed irrespective of the spot rate prevailing. Earl* (eli!er* ,when a customer re>uests early delivery of a forward contract i.e. before the due date, the bank may accede to the re>uest provided the customer agrees to bear the loss if any that may accrue to the bank. When the bank enters into a forward purchase contract with the customer it would have covered its position by entering into a forward sale contract in the market for the same amount and for matching period. 'his is so that the bank when the bank receives the currency on the due date it may deliever the same in the market on the same date. !or e+ample if the bank has entered into a F;S' 2ctober !orward sale contract for $S/ ;<<<<.<< LHD.;H<< on <F.<P.=<<D with the customer theoretically it will go to the market and would enter into a forward purchase contract for the same value .5ow the customer comes on =C.<C.=<<D with a re>uest to pick up the contract the bank can buy the dollars from the market and give it to the customer at the spot rate prevailing. &ut since the bank has already entered into a forward purchase contract in the market due on F;.;<.=<<D the bank will have to enter into another forward contract value F;.;<.=<<D so that the dollars already purchased may be disposed off. !or this the bank may enter into a SW*9 wherein buying value =C.<C.=<<D and sell value F;.;<.=<<D. 'he SW*9 difference may be Sw*9 loss or SW*9 gain depending upon the current market. If the bank buys high and sell low the difference is a SW*9 loss recoverable from the customer but if the bank buys low and sells high the differenc is SW*9 gain payable by to the customer. $ancellation on (ue (ate ,- when a forward purchase contract is cancelled at the due date the bank purchases the dollars at the rate agreed upon originally and sells the dollars at the ready ''selling rate. 'he difference between the two rates is :ecovered from/9aid to the customer. If the purchase rate is higher than the '' selling rate the difference is payable to the customer and if the selling rate is higher than the original rate the difference is recoverable from the customer. Earl* cancellation ,- if a forward contract is re>uired to be cancelled earlier than the due date it would be cancelled at the forward selling rate prevailing on the date of cancellation, the ue date of this contract will be synchroni ed with the due date of original contract. Extension on (ue (ate ,When a forward contract is sought to be e+tended on due date it shall be cancelled and rebooked for the new delievery period at the prevailing e+change rates. 'he difference recoverable/payable will be debited/credited to the customers account. O!er(ue for.ar( contracts ,'he customer has the right to utili e or cancel or e+tend the forward contract on or before its due date.5o such right e+ists after the due date. !)/*I provides for the automatic cancellation of the forward contract which remains overdue without any instructions from the customer concerned on or before its due date.'he customer remains liable to pay for the difference so occurring by cancellation of contract however any gain resulting shall not be passed to him. IIIIIIIIIII??????IIIIIIIIIII