Introduction

Whether you’re an importer or an exporter, you always want to ensure you make a good profit when finalizing orders for goods or services. You usually do this by considering the expected currency rate. However, there’s often a time gap between when you place an order and when the delivery happens, and during this period, currency rates can change. Sometimes these changes can boost your profits, but other times, they can reduce them or even cause losses.

This blog post will equip you with the basics of forward contracts and how ForexField can help you:

• Lock in favorable exchange rates
• Protect your profits
• Make the most of every international deal

Understanding Forward Contracts

A forward contract is an agreement to exchange one currency(USD) for another(INR) on a specific future date at an exchange rate agreed upon when the contract is made. This contract is priced at either a ‘premium’ or a ‘discount’ compared to the current spot rate.

Key Fact

”The interest rate differential between two countries, such as the 5.20%(premium) Fed rate in the USA and the 6.50% (discount)repo rate in India, determines whether a specific currency pair is traded at a premium or discount”

In simple terms, when hedging with a forward contract in India, an exporter will receive a premium up to the delivery date, while an importer will pay the premium.

Benefits of Forward Contracts for Importers & Exporters

• Importers: Avoid losses due to rupee depreciation.  Lock in a fixed rate, so you know exactly how much you’ll pay for foreign goods.
• Exporters: Protect profits from rupee appreciation. Secure a favorable rate, ensuring a predictable return on your exports

Example of Forward contract

Let’s say the USD/INR spot rate is 83.10. You can secure a forward contract with:

• 3-month premium: 0.30 paisa
• Bank margin: 0.10 paisa

As an exporter: You’d get a contracted rate of 83.30 INR per USD, locking in some upfront gains.

As an importer: You’d pay a contracted rate of 83.50 INR per USD, a small price for guaranteed cost certainty.

RBI framework for hedging currency risk

Importers or exporters can choose to hedge using contracted or anticipated exposure.

Contracted Exposure

Underlying need to be exists (like a purchase order or proforma invoice) when you book the forward contract.

 Anticipated Exposure

Underlying need not to be  exists (like a purchase order or proforma invoice) when you book the forward contract.

Important

For businesses with annual exposures under USD 100 million, contracted exposure is preferred. It allows you to book or cancel forward contracts without showing underlying documents, simplifying the process.

Delivery/Maturity of Forward contract

On maturity either you’ve to utilise the forward contract or cancel the same with your bank , considering below points :

In case payment is not received & contract is cancelled as per your instructions then loss if any shall be recovered upfront & profit shall be passed up to maturity date.

In the absence of any instructions from your side contract will be cancelled within 3 working days after maturity, during contract cancellation loss if any incurred by Bank shall be recovered & no profit to be passed.

You can go through RBI master directions on hedging currency risk before actually entering in forward contracts through the below link: RBI Master Directions

Contact us today to learn more and take first step towards global success !