Question on early delivery

 

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. Rs. 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= Rs 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.)

 Plz correct me.

 

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