FORWARD CONTRACTS

What is Forward Contract

Forward 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 Contracts

Exporters 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

1.Contracted Exposures

2.Probable Exposures based on Past Performance

3.Special Dispensation

Contracted Exposure
AD 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
Exporter : To
hedge
currency risk on the basis
of a declaration of an exposure and based on
Performance
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

Performance
Contracts 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
1.Small and Medium Enterprises ( SMEs).
2.Resident Individuals.

Special
SMEs : - Permitted to book Forward Foreign Exchange
Contracts without production of underlying documents
Dispensation(cont.)
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:
1.Limits should be in line with the credit facilities availed
by them for their foreign exchange requirements.
2.AD should carry out due diligence and user
appropriateness and suitability of FC to the SME
3.The 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
Resident Individuals
Dispensation(cont)
To hedge their foreign exchange exposure arising out of
1.

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 .
2. The contracts booked under this facility would
normally be on deliverable basis and booked upto a
tenor of 1 year only.
3.In case of mismatches of cash flows or other
exigencies, these contracts be cancelled and rebooked.

Persons resident outside

India
Foreign Institutional Investors (FIIs)
Persons having Foreign Direct Investment in

India
Non-resident Indians (NRIs)

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

Merchant Forward Contracts

Fixed Date Contract Foreign

Exchange to be delivered at a
fixed future date
Option forward Contract
Foreign
Exchange
to
be
delivered during a specified
future period not exceeding
one month

Dates of delivery

In 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

Utilisation

Contracts
are
firm
and
delivery has to be taken on
maturity
date.
However,
certain relaxations are
Part utilisation of Contract
Substitution of Contract
Higher amount of foreign
currency than originally

How forward rates calculated

and quoted
a.

b.

c.

d.

Take an appropriate spot

rate
Arrive at the base rate at
which
the
cover
transaction
can
be
undertaken in the market
Add/deduct
forward
premium/ discount
Add/deduct profit margin

CANCELATION OF
FORWARD CONTRACT
Forward 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 500
Cancellation 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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