Indian exporter, for instance instead of grouping in the dark or making a wild guess
about what the future rate would be, enter into a contract with his banker immediately. He
agrees to sell foreign exchange of specified amount and currency at a specified future date.
The banker on his part agrees to buy this at a specified rate of exchange is thus assured of his
price in the local currency. For example, an exporter may enter into a forward contract with
the bank for 3 months deliver at Rs.49.50. This rate, as on the date of contract, is known as 3
month forward rate. When the exporter submits his bill under the contract, the banker would
purchase it at the rate of Rs.49.50 irrespective of the spot rate then prevailing.
When rupee was devaluated by about 18% in July 1991, many importers found their
liabilities had increased overnight. The devaluation of the rupee had effect of appreciation of
foreign currency in terms of rupees. The importers who had booked forward contracts to
cover their imports were a happy lot.
Date of delivery
According to Rule 7 of FEDAI, a forward contract is deliverable at a future date,
duration of the contract being computed from the spot value date of the transaction. Thus, if a
3 months forward contract is booked on 12 th February, the period of two months should
commence from 14 th February and contract will fall on 14 th April.
Fixed and option forward contracts
The forward contract under which the delivery of foreign exchange should take place
on a specified future date is known as ‘Fixed Forward Contract’.
For instance, if on 5 th March a customer enters into a three months forward contract with his
bank to sell GBP 10,000, it means the customer would be presenting a bill or any other
instrument on 7 th June to the bank for GBP 10,000. He cannot deliver foreign exchange prior
to or later than the determined date.
Forward exchange is a device by which the customer tries to cover the exchange risk.
The purpose will be defeated if he is unable to deliver foreign exchange exactly on the due
date. In real situations, it is not possible for any exporter to determine in advance the precise
date. On which he is able to complete shipment and present document to the bank. At the
most, the exporter can only estimate the probably date around which he would able to
complete his commitment.
