Monday, November 16, 2009

Banking Fundamentals-Trade Finance

Forward Contract

The exchange rate between two currencies is subject to change accordingly to the market conditions. Such movement in rate can prove disastrous. To ensure against such eventuality, corporate bodies resort to taking cover of their exposures in various currencies. They enter into contracts with Banks, undertaking to delivery / take delivery of certain quantum of foreign exchange at a pre-determined future date/period, at a certain rate. These contracts are referred to as Forward Contracts. Because of very nature of the transaction (uncertainty), the contracts are subject to amendment. These amendments make take the form of ‘extension’ or ‘cancellation’. Normally the contracts are closed by ‘delivery’.

Banks provide this as a service to its customers who deal with foreign currencies and the bank generally charges a service charge for each event while issuing a Forward Contract for forms part of the service charge income to the bank

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