Execution of Forward Contracts ABC Bank, Kanpur branch is an Authorized Dealer in 'Foreign Exchange' and authorized dealer status given by Reserve Bank of India as "A Category". Number of Export/Import oriented units loc

Execution of Forward Contracts ABC Bank, Kanpur branch is an Authorized Dealer in 'Foreign Exchange' and authorized dealer status given by Reserve Bank of India as "A Category". Number of Export/Import oriented units located in SEZ, Kanpur are the clients of ABC Bank, Kanpur Branch. As ABC Bank, Kanpur is only one 'Forex Authorized Branch' located in Kanpur, Exporters and Importers situated within the radius of 60 KM are visiting to the Branch to clarify their doubts with regard to discounting of Export Bills/Import Bills/Letter of Credit etc. from Chief Manager, Foreign Exchange Division of ABC Bank, Kanpur Branch. The Controlling Authority of ABC Bank, Kanpur observed the above situation and instructed the Branch to conduct Exporters/Importers Meet on 9th April, 2020 to mobilize 'Foreign Exchange Business' from Exporters and Importers to the Branch books. Accordingly, ABC Bank, Kanpur Branch followed the instructions of their Controller and invited all the Exporters/Importers surrounding to the Branch and also within a radius of 60 KM. They conducted Meet in a Five Star Hotel in Kanpur in a big way. During the Export/Importers Meet number of questions were raised by prospective customers and the same was suitably replied by Senior Staff members of the Bank. Existing and prospective customers were satisfied with the replies given by Bank officials. One clarification sought by 'Number of Customers' is on "Forward Contract" Product of International Banking. Most of them are not utilized this Product offered by ABC Bank, Kanpur. Mr. Suresh, Chief Manager of the Branch explain the 'Forward Contracts' Product features offered by the Branch as follows: Forward Contract is the traditional method by which Exporters and Importers were hedging their foreign currency exposure. It affords perfect hedge for foreign currency exposures. The uncertainty about the rate that would prevail on a future date is known as the 'exchange risk'. For the exporter the exchange risk is that the foreign currency in which the transaction is designated may depreciate in future and may bring less than the expected realization in local currency terms. The importer too faces exchange risk when the transaction is designated in a foreign currency. The risk is that the foreign currency may appreciate in value and he may be compelled to pay in local currency an amount higher than that was originally contemplated. Importers generally make arrangements for loans for payment for the imports. If the foreign currency appreciates subsequent to the arrangement of the loan, the importer may find that the resources are not sufficient to meet the importer bill putting him in a difficult situation. Forward contract provides perfect hedge against fluctuations, but it also takes away the opportunity to make profits from favorable movements in exchange rates. Forward contracts impose an obligation on the parties to execute it on the due date irrespective of the spot rate prevailing. On execution, only the rate agreed to in the contract will be applied. If one wants to cancel the contract to take advantage of the better rate in the spot market, the counterparty will levy cancellation charges which will be greater than the benefit obtained in the spot market. By definition, the time and amount of foreign exchange to be delivered are predetermined under a forward contract and the customer is bound by the agreement. So, theoretically, there should not be any variation and on the due date of the forward contract the customer will either deliver or take delivery of the fixed sum of foreign exchange agreed upon. But, in practice, quite often the delivery under a forward contract may take place before or after the due date, or delivery of foreign exchange may not take all. The bank generally agrees to these variations provided the customer agrees to bear the loss if any, that the bank may have to sustain on account of the variation. The foreign exchange may be delivered on the due date as per the forward contract. Or, the delivery may take place earlier or later than the due date. Alternatively, the customer may request cancellation of the contract. This request for cancellation may be made on the due date, before the due date or later than the due date. Yet another alternative is that the customer may request postponement of the date of delivery under the forward contract. This request for postponement may be made on the due date, earlier than the due date or after the due date. The various possibilities of forward contracts are summarized in the form of table below: Due Date Delivery Delivery Early Delivery Late Delivery Due Date Cancellation Forward Contract Cancellation Early Cancellation Late Cancellation Due Date Extension Extension Early Extension Late Extension It is clear that a forward contract may end up in any of the following ways: Delivery on the Due Date. Early Delivery. Late Delivery. Cancellation on the Due Date. Early Cancellation. Late Cancellation. Extension on the Due Date. Early Extension. Late Extension. Cancellation: The Exporter may approach the bank for cancellation when the underlying transaction becomes infructuous, or for any other reason he wishes not to execute the forward contract. If the underlying transaction is likely to take place on a day subsequent to the maturity of the forward contract already booked, he may seek extension in the due date of the contract. Such requests for cancellation or extension can be made by the customer on or before the maturity of the forward contract. Extension: An exporter finds that he is not able to export on due date but expects to do so in about two months. An importer is unable to pay on due date but is confident of making payment a month later. In both these cases they may approach their bank with which they have entered into forward contracts to postpone the due date of the contract. Such postponement of the date of delivery under a forward contract is known as the extension of forward contract. Based on the above information, read the following case study and answer the questions that follows: On the next day of Exporters/Importers Meet of the Bank, an Import Customer approached ABC Bank, Kanpur Branch and booked a forward contract with the Bank on 10th April for USD 20,000 due 10th June at ₹49.4000. The bank covered its position in the market at ₹49.2800. Particulars 10th June 20th June Spot USD 1 = 48.8000/8200 48.6800/7200 Spot/June 48.9200/9500 48.8000/8500 July 49.0500/0900 48.9300/9900 August 49.3000/3500 49.1800/2500 September 49.6000/6600 49.4800/5600 Exchange margin 0.10%. Interest on outlay of funds 12%. How will ABC Bank, Kanpur react if the Importer Customer request on 20th June: (i) Calculate the following in case the Contract is Cancelled. (a) The Exchange Difference amount.