How it verify forwards contract and other derivatives?

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CA.CS.V.Viswanathan

CA.CS.V.Viswanathan (Querist)

28 August 2009 Our company imports raw material from US for which the payment is made in dollar.. And a credit time of 1 month... In order to mitigate the exchange rate the company enters into forwards contract... How Is verify such contacts ? What are items to be verified? Please clarify

Krunal Raichura

Krunal Raichura (Expert)

28 August 2009 Verify the balance (dollars to be paid) of material and the amount of hedging. The amount of hedging should not be so higher that it shows intentions of speculation.
For example, if you have to pay a lakh dollars after 1 month, and the forward contract to purchase dollars is of notional 5 lakh dollars...if thats the case, enquire why the difference?

Refer to the FEMA rules for Derivative Contracts and check the compliance with the same. If it does not comply with the rules, you may qualify the report. FEMA violation is very dangerous and it can lead to very harsh consequences for Directors and officers in default.

Find out what will be the reference rate - will it be the reuters rate or bloombergs rate, or the NSE Futures Rate...etc?

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