Early delivery of forex

Final 1937 views 4 replies

 

Que.-  On 15 July, 2007, SBI booked a forward purchase contact for Euro 50,000 due August 30 @  Rs. 56.35.  On 10th Aug. the customer requests the bank to extend the forward contact for 30th Sept. Foreign Exchange rates on 10th August are:

Spot                                          56.1325  56.1675

Forward 30th Aug.                     55.6625  55.7175

Forward 30th Sept.                     55.4425  55.5375                                                     

At what rate the contract will be extended? What amount of loss / gain will be receivable from / payable to customer?

 Answer:  On 10th August, the bank will enter into two forward contacts with the customer.

(i) under first contract (maturity 30th August, 2007),  bank will sell Euro 50,000 to the customer on 30th  August @ 55.7175 (this contract is necessary for cancellation  of 15th July contract )                                 

(ii) under second contract,  bank will purchase Euro 50,000  from the customer on 30thSept. @ 55.4425 (this contract is necessary as the customer wants  Euro 50,000 on this date on forward basis )

 On 30th August:

(i)  The Bank will purchase Euro 50,000  from customer ( under 15th July contract) for 50,000 x 56.35 i.e. Rs. 28,17,500

(ii)  The Bank will sell Euro 50,000 to customer for 50,000 x i.e. 55.7175 i.e.27,85,875   ( under the first contract entered on 10th August).

(iii)  Profit to customer is Rs. 31,625. This profit will be paid to customer on 10th August itself.



Doubt-  In this case bank is suffering a loss- (56.35 - 55.7175)* 50000=31,625  mentioned as profit for customer in solution above. But we know that bank will not bear any loss on itself so it will recover this loss from the customer.( As it is a cancellation of contact before maturity.) So, why it is written that that profit amt will be paid to customer ? Also, it is not possible to calculate exact profit/loss of Bank as the bank must have squared up the Transaction in the Inter Bank rate which are not given here.

 Plz suggest

Replies (4)

The bank is only making arrangement for  contract which it has entered in inter bank market.

The deal of Inter bank market cannot be cancelled as it is in case of merchant trade.

As customer has failed to keep up his promise its putting customer's head  under the Guillotine to buy from the inter bank mkt and sell back to bank  @ the Fwd rate agreed intially as it is a case of early delivery.

In this process for sure bank will not make any profit except the basic excahnge margin it charges but customer may or may not make profit.

U cannot say Bank is making a loss or pft.Bank has not at all exposed it self to risk ,how can it make pft  or loss.

 

Friend

As per ur explaination, it seems that u r assuming the above Forex rates as Inter Bank rates ?

Accordingly, the bank enters into Inter Bank market on behalf of Customer & earn Ex. margin in this process. This is waht u wanna say ?  


    Yes it is ,There is no need to assume it. Bank at the max can earn exchange margin tats it.

    Let me elaborate the entire process of the case wat u ve provided.

   
    Original contract :Forward Purchase contract.
   


    Bank has agreed to BUY from the customer EURO 50000 on 30th August and instantly makes an inter Bank Deal to SELL the same on Same Date.Here Bank has already Freezed its Exchange Margin.



     



    Now Customer wants to cancell the contract on Aug 10th.



     



    Question Arises -Can bank Cancel the same in inter Bank market .No it cant.



     



    Bank forces the customer to buy from inter Bank market on Forward basis on Aug 30 @   Forward rate available in the market i e 55.7175 and sell to bank Forward at intially agreed Forward rate ie 56.35.This process is called Cancellation of contract.Obviously Customer cant deal in the IB Mkt ,it ll be Bank who ll be doing this deal on behalf of the customer.Bank will again charge here Exchange margin.



     



    In this process



     



    1)customer will make profit or loss wat so ever cos its customer's head under the Guillotine i e customer is exposed to risk.So profit to customer 36125.



     



    2) Bank will charge exchange Margin on each & every transaction it does on behalf of the customer,tats it but in this problem there is no EM.



     



    Hope to be clarrified.



     



     



     

 

gr8..so nice of u...well done & thanks a lot


CCI Pro

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