FORWARD CONTRACT. CONVENTIONAL PROCESS FOR FORWARD CONTRACT. Forward Exchange Cover (FEC) facility is available to Importers/Exporters to mitigate exchange risks on under Document Credits (DC) and Import/Export Contract (Cont)
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7) On Day 90, Importer pays 61,100,000/- to MBL and gets US$ 1 million.
8) On Day 40, Importer indicates his inability to take the delivery and wishes to close out
9) MBL sells $ to client on Booking Rate i.e. @ 61.1 and buys it back at the lower of:
10) Prevailing Rate on Day 1 i.e. 60
Prevailing Rate on Day 40 say 61
11) Client will be charged 61.1-60 = 1.1 per $ i.e. 1,100,000
12) In case the prevailing rate on Day 40 was 58,
13) The importer will be charged 61.1-58 = 3.1 per $ i.e. 3,100,000
1)Day 1 Exporter comes to MBL. He will receive US$ 1 million on Day 90. Wants to book forward rate.
2)Prevailing Rate on Day 1 is 60.
3)MBL sells US$ 1million spot @ 60
4)MBL enters into a spot buy: forward sale swap with another bank XYZ
5)XYZ Bank charges a Rs 1 premium
6)MBL adds its fee of Rs 0.10 and quotes a forward rate of 60-1-0.1 = 58.9
7) On Day 90, Exporter receives 58,900,000/- and pays US$ 1 million to MBL.
(7A)On Day 40, Exporter indicates his inability to give the delivery and wishes to close out
8)MBL buys $ from the exporter on Booking Rate i.e. @ 58.9 and sell it back at the higher of:
(i) Prevailing Rate on Day 1 i.e. 60
(ii)Prevailing Rate on Day 40 say 59
9) Client will be charged 60-58.9 = 1.1 per $ i.e. 1,100,000
In case the prevailing rate on Day 40 was 62,
the exporter will be charged 62.-58.9 = 3.1 per $ i.e. 3,100,000
Scenario 1: Complete Transaction maturing on Forward Delivery Date
Day 1 Importer comes to MBL. He has to pay US$ 1M on Day 90 to his overseas supplier. Wants to book forward rate.
Prior to or on the delivery date, importer indicates his inability to take the delivery and wishes to close out the contract (eg. Day 40).
On Day 40 MBL will do the following:
In case the Importer wants the delivery of US$1M on Day 80 instead of Day 90
On Day 80 MBL will do the following:
1) Buy US$1M from the market at spot rate (say @ Rs64/US$)
2) Settle the contract with the importer by selling US$1M for Rs 61.1 M as per the initial contract.
3) Enter into forward sale agreement with ABC bank (say @ Rs63/US$)
4) Charge the Importer upfront the difference (i.e. Rs 1/US$)
5) In addition, client will also be charged commission to execute this additional transaction.
6) On Day 90 MBL will receive US$1M from XYZ and will sell the same to ABC.
(7A) Prior to or on the delivery date, client indicates his inability to take the delivery and wishes to close out the contract.
9. Prevailing Rate on Day 90 is 64.
10. MBL charges 100,000 from client as its fee. MBL sells US$ 1 million to XYZ bank and receives 59,000,000. It buys $ on spot at 64 and loss 64,000,000-59,000,000 = 5,000,000 is charged to the client. .
11. Prevailing Rate on Day 90 is 58.
12. MBL charges the client 100,000 as its fee. It buys $ on spot at 58 and gains 59,000,000-58,000,000 = 1,000,000. This gain is forwarded to SBP.
The transformation commission of State Bank of Pakistan (with some other Shariah scholars) approved the following foreign currency forward cover transaction. We could do the same procedure for our Araboon/Hamish Jiddiyyah transaction of shares.
The Commission observed that forward foreign currency covers will be permissible subject to the following conditions:
i) The amount of foreign currency is needed for genuine trade or payment transactions. The need will have to be supported by appropriate documents so as to prevent forward cover for speculative purposes.
ii) The forward cover shall be through an agreement to sell or purchase and it shall not be a sale and purchase agreement. It means that sale/purchase shall take place simultaneously at the agreed time in future at the rate agreed upon initially at the time of agreement to sell or purchase.