Forward Contracts in Forex
Booking a forward is easy. Servicing it, from early delivery to the overdue contract, is what the exam tests.
A forward contract fixes today the rate at which a customer will buy or sell foreign currency on a future date beyond spot. An exporter expecting USD in three months locks the rupee value now; an importer with a bill due later locks the cost. The rate risk passes to the bank, which covers it in the interbank market.
For a branch the hard part is not booking the contract but servicing it: early delivery, extension, cancellation and the contract nobody turns up to deliver. FEDAI Rule 6 governs all of it.
You save ₹200 today
- 5 full-length mocks
- 553 questions, chapter by chapter
- Rate & risk calculations
One payment, no subscription · Valid for 2 months
Contract Terms Under FEDAI Rule 5
- Definite amount and period
- Every exchange contract must be for a definite amount and period (Rule 5.1).
- Fixed date forward
- Delivery on one stated date.
- Option forward
- Delivery on any day within a stated option period, at the customer's choice. The option period cannot exceed one month, and the contract must state its first and last dates (Rule 5.2).
- Option of delivery
- In all forward merchant contracts except non-deliverable derivative contracts (NDDCs), the customer, whether buyer or seller, holds the option of delivery (Rule 5.5). The bank quotes the rate least favourable to the customer across the option period, since the customer chooses the date.
- Date of delivery
- For bills negotiated or purchased, the date the rupees are paid to the customer; for collection bills, the date of payment on realisation; for import bills, the date of retirement or crystallisation, whichever is earlier (Rule 5.4).
Who May Book a Forward and Why
RBI's Master Direction on Risk Management and Inter-Bank Dealings allows banks to offer deliverable forwards involving the rupee to users for hedging. The exposure can be contracted (a deal already entered into) or anticipated (a permissible transaction expected in future). Both resident and non-resident users are eligible, and forwards are among the products open to retail users.
While the contract runs, the bank must ensure the same exposure is not hedged twice and that the forward's amount and tenor do not exceed the exposure's. Users may hold up to USD 100 million notional, across all banks, against contracted exposure without having to establish the underlying, though they must still have a valid unhedged exposure and be able to prove it if asked.
Servicing a Forward: FEDAI Rule 6
| Event | Treatment |
|---|---|
| Early delivery | Optional for the bank. The bank recovers or pays swap difference, plus interest on any outlay or inflow of funds the swap creates. Swap cost is recovered whether or not an actual swap is done. |
| Extension | The contract is cancelled at the current rate and rebooked at the current rate. The exchange difference is settled with the customer. The request must come on or before maturity. |
| Cancellation on or before maturity | Purchase contracts are cancelled at TT selling, sale contracts at TT buying (forward TT rate if before maturity). The difference is recovered from or paid to the customer; recovery may be in instalments, at least quarterly, ending by the original maturity. |
| No instruction at maturity | The bank cancels the contract within three working business days after maturity, as per its policy. Any loss is recovered; any gain is not passed on, unless the bank records that the lapse was beyond the customer's control. |
| Contract becomes impossible to perform | It is not void. The customer must apply for cancellation under the normal rules. |
Option periods, cancellation and swap cost. No signup.
Cancel and Rebook: the Rule Changed
Older courseware restricts rebooking of cancelled forwards by maturity, purpose or bank, and some practice questions still test those limits. RBI's current direction tells banks to allow users to freely cancel and rebook derivative contracts. The one condition: net gains on contracts booked against an anticipated exposure are passed to the user only when the underlying cash flow happens, except in documented cases beyond the user's control.
How CCFE Tests This
- check_circleOption period maximum (one month) and who holds the option (the customer, buyer or seller).
- check_circleThe cancellation rate pair: purchase contract at TT selling, sale contract at TT buying. The trap reverses them.
- check_circleOverdue contracts: cancelled within three working days after maturity, gain withheld, loss recovered.
- check_circleEarly delivery: swap cost is recovered even if the bank did no actual swap.
- check_circleExposure rules: notional and tenor of the hedge cannot exceed the exposure.
FAQs
What is a forward contract in forex?expand_more
An agreement to buy or sell a fixed amount of foreign currency at a rate fixed today, for delivery on a date beyond spot. In India it is booked by an Authorised Dealer to hedge a contracted or anticipated exposure.
What is the maximum option period in an option forward contract?expand_more
One month. FEDAI Rule 5.2 says the option period of delivery shall not extend beyond one month.
At what rate is a forward purchase contract cancelled?expand_more
At the bank's TT selling rate, or the appropriate forward TT selling rate if cancelled before maturity. A sale contract is cancelled at TT buying.
What happens if a customer neither delivers nor cancels a forward contract?expand_more
The bank cancels it within three working business days after maturity. The customer pays any exchange loss and swap cost but is not entitled to any gain, unless the bank records that the default was beyond the customer's control.
Can a cancelled forward contract be rebooked?expand_more
Yes. RBI's current direction requires banks to allow users to freely cancel and rebook, with gains on anticipated-exposure hedges paid only when the underlying cash flow occurs.
Next steps
- Premium & Discountarrow_forward
- Value Datesarrow_forward
- Swaps and optionsarrow_forward
- FEDAI Rulesarrow_forward
100 questions across all six modules, timed.