A customer with whom the bank had entered into 3 months forward purchase contract for Swiss Francs 20,000 at the rate of ₹74.25 comes to the bank after two months and requests cancellation of the contract. On this date,

Answer 4(a) Bank had sold forward Swiss Francs for the customer. Now, bank has to square up the trade buying 1 month forward Therefore, the rate applicable will = 74.25 Outflow on account of square up = 74.52 Net outflow to be received from the customer = 0.27 per Swiss Francs Total payment = 0.27 × 20,000 = ₹5,400 The cancellation has resulted in loss of ₹5,400 to the customer Alternative Solution On the day the customer comes to the bank for cancellation, the bank will enter into a forward contract (same maturity date as that of the original) under which bank will sell 20,000 Swiss Francs @ 74.52 (Amount to ₹14,90,400). On maturity, bank will sell 20,000 Swiss Francs to customer (@ 74.52) for ₹14,90,400 (under the new contract) and purchase of 20,000 Euro from the customer @ 74.25 for ₹14,85,000 (under the original contract). Loss to the customer is ₹5,400. (This loss will be recovered from the customer)