Cancellation and extension of forward contracts, Marketing Research

Assignment Help:

Cancellation and Extension of Forward Contracts: If the exporter is not able to deliver even within the option period, he may approach to the bank either for cancellation or for extension of forward contracts. Let us discuss them in detail.

1) Cancellation: The customer who has booked a forward contract may not be able to execute it and therefore, request the bank for cancellation. The bank would generally agree for the cancellation provided the customer is willing to bear the loss incurred by the bank by such cancellation.

When a forward purchase contact is cancelled on the due date, it is taken that the bank purchases at the rate originally agreed upon and sells back to the customer at the spot TT rate. The difference between these two rates is the loss on the transaction and is recovered from the customer. Of course, the amounts involved in purchasing and sale of foreign currency are not passed through the customer's account. Only the difference, being the loss on the transaction, is recovered by way of debit to the customer's account.

In the same way when a forward sale contract is cancelled it is treated as if the bank sells at the rate originally agreed and buys back at the spot buying rate. The difference between these two rates represents the loss to the bank and is recovered from the customer.

It is possible that the exchange difference is in favour of the customer. That is, the difference may result in a profit instead of loss. Such profit is passed on to the customer provided the contract is cancelled at the request of the customer.

2) Extension: An exporter may find that he is not able to export on the due date but expects to do so in about two months. So also, an importer may be unable to pay on the due date but is confident of making payment a month later. In both these cases they may approach their bank with whom they have entered into forward contracts to postpone the due date of the contract. Such postponement of the date of delivery under a forward contract is known as the extension of forward contract.

For extension of sale contracts the exchange control regulations provide that the contract, may be extended if the relative letter of credit or fm contract is extended for shipment and the import licence is valid for the extended period.

When the bank enters into a forward purchase contract with a customer it covers its own position by selling in the inter-bank market the same amount for the same delivery period.

On the due date when the contract is extended, irrespective of the fact that the customer has not delivered foreign exchange, the bank has to meet its commitment. For this purpose the bank buys spot from the market and delivers under the original contract.

Supposing the customer requires extension of two months, after two months the bank would be in receipt of foreign exchange under the extended contract. To cover its position the bank enters into a forward contract for two months.

The operations involved may be tabulated as under:

On the' date of the contract:

a) Purchase forward from customer

b) Sell forward to the market at market buying rate.

On due date when contract is extended:

c) Purchase spot from market

d) Sell forward to market at market at market to selling rate to fulfil

(b). buying rate to cover extended delivery of (a).

The bank will charge from the customer the loss suffered by it as also interest to the outlay of funds for the extended period. It will also make a flat charge.


Related Discussions:- Cancellation and extension of forward contracts

Nature of cargo insurance policy, NATURE OF CARGO INSURANCE POLICY ...

NATURE OF CARGO INSURANCE POLICY A marine or cargo insurance policy has an international character and, therefore, a policy taken in one country is acceptable in other coun

Explain about the internal consistency reliability, Explain about the Inter...

Explain about the Internal consistency reliability Internal consistency reliability is used to assess the reliability of a summated scale where several items are summated to fo

Frustration of contracts , FRUSTRATION OF CONTRACTS : There can be several...

FRUSTRATION OF CONTRACTS : There can be several factors beyond the control of the parties to a contract which makes the performance of contractual obligations impossible. Example

How can you explain information processing, Q: How can you explain Informat...

Q: How can you explain Information Processing? Ans: A customer can acquire information from several sources: Personal sources- friends, family, neighbours etc C

Types of non sampling errors, Defective Problem Definition: Problem on whic...

Defective Problem Definition: Problem on which research is to be undertaken should be precisely defined. For example a study on unemployment must be clear as to the concept o

Evaluating awareness and potential for IMC in b2b in pune, what will be the...

what will be the scope for the above study for imc in b2b market domain and SWOT analysis,future growth and prospects of the study

Mutual lending, just give an example of firm write about socially responsib...

just give an example of firm write about socially responsible indicating brief desciption?

Form of contract-nature of export sales contract, Form of Contract: Th...

Form of Contract: There are no universally acceptable norms as to the form of export contracts. It need not be a formal document signed by both the parties and it need to be s

Conducting business in global marketing, how do sociocultural, economic, le...

how do sociocultural, economic, legal and environment forces factor into conducting business in global marketing?

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd