International Business

What is Extension of Forward Contracts

An exporter finds that he is unable to export on the due date but expects to do so in about two months. An importer is unable to pay on the due date but is confident on 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.

Until recently the practice was to extend the contract at the original rate quoted to the customer and recover from him charges for extension. The Reserve Bank has directed that, with effect from 16.1.95, when a forward contract is sought to be extended, it shall be cancelled and re-booked for the new delivery period at the prevailing exchange rates.

FEDAI has clarified that it would not be necessary to load exchange margins when both the cancellation and re-booking of forward contracts are undertaken simultaneously. Therefore, the cancellation will be done at the inter-bank rates rather than the merchant rates since no exchange margin need be recovered on cancellation. The inter-bank rate may be rounded off to the advantage of the bank as otherwise it may result in a loss to the bank.

Similarly the rate for the re-booked contract will be quoted as for any new contract, but without loading exchange margin. The rate may again be rounded off to the advantage of the bank to avoid loss on this count. Further only a flat charge of Rs. 100 (minimum) should be recovered and not Rs. 250 as in the case of booking a new contract.

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