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FORWARD CONTRACTS
Job
Card
No

Contents

Page No

Introduction

2-7

Operational Matters

8-12

Purchase Contracts

13

Sale Contracts

14

Early Delivery/ Extensions /

Cancellations

15-17

Forward Contracts Cross

Currencies

18-23

Forward Contracts Rupee

Options

24-29

Job Card (Fwd Contracts) No. 1

INTRODUCTION TO FORWARD CONTRACTS

Basic Information
A forward contract or simply a forward is a non-standardized contract between two
parties to buy or sell an asset at a specified future time at a price agreed today. This
is in contrast to a spot contract, which is an agreement to buy or sell an asset today
with delivery after 48 hours (next to next working day). It costs nothing to enter a
forward contract. The party agreeing to buy the underlying asset in the future
assumes a long position, and the party agreeing to sell the asset in the future
assumes a short position. The price agreed upon is called the delivery price, which is
equal to the forward price at the time the contract is entered into.
By entering into a Forward Contract, an Indian Exporter who has entered into a
Purchase Contract with us for the delivery of contracted currency at a future date. In
a similar fashion, an Indian Importer who has entered into a Sale contract with us for
his import of goods from a foreign supplier, will be able to arrive at his Indian Rupee
liability.
To sum up, a forward is an agreement between two counterparties a buyer and
seller. The buyer agrees to buy an underlying asset from the other party (the seller).
The delivery of the asset occurs at a later time, but the price is determined at the
time of purchase.
How Forward Rate is Calculated
Forward Rate is the derived future value of a currency pair based on the
current spot value of the pair.
Forward Rate : Spot Exchange Rate + or Forward premium/ discount based
on Interest differential expressed in exchange rate points
Forward differentials generally represent the interest rate differential between
the pair of currencies
Premium

Base Currency Costlier in Future

Differential added to Spot Rate
Interest Rate of Base Currency is Lesser

Discount

Base Currency Cheaper in Future

Differential reduced from Spot Rate
Interest Rate of Base Currency is Higher

Key features of forward contracts are

Forward Contracts are in the nature of Over the Counter contracts (OTC).

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Highly customized - Counterparties can determine and define the terms and
features to fit their specific needs, including when delivery will take place and
the exact identity/quantity of the underlying asset.

All parties are exposed to counterparty default risk This is the risk that the
other party may not make the required delivery or payment.

Underlying assets can be a stocks, bonds, foreign currencies, commodities or

some combination thereof. The underlying assets may include interest rates
contracts.

They tend to be held to maturity and have little or no market liquidity. Since a
forward contract is between two parties, there is no secondary market for the
purchase and sale of these contracts, making them rather inflexible or
expensive to terminate early or extend.

Contracts may be booked for delivery on a fixed date or optional delivery

period. However, the option period of delivery is for a maximum of one month.
Contracts permitting option of delivery must state the first and the last date of
delivery. The delivery option lies with the customer. If the fixed date of delivery
or last date of delivery (optional contracts) falls on a holiday/declared holiday,
the delivery shall be effected/delivery option exercised on the preceding
working day.

Thus, forward contract is one of the basic and simple hedging instrument available
for individuals/corporates to manage foreign currency exposure risk. If one does not
hedge, it may be akin to speculating that the foreign currency rate will always stay
the same, a costly assumption if the rate ends up moving unfavorably. A good
hedging strategy can help eliminate currency exposure and the attendant risk
associated with currency movements.

RBI Guidelines on Forward Contract

A person resident in India may enter into a forward contract with an Authorised
Dealer in India to hedge an exposure to exchange risk in respect of a transaction for
which sale and/or purchase of foreign currency is permitted under FEMA, 1999 or
rules or regulations or directions or orders made or issued there under, subject to the
following terms and conditions:
a) The AD bank through verification of documentary evidence is satisfied
about the genuineness of the underlying exposure, irrespective of the
transaction being a current or a capital transaction. Full particulars of
the contract should be marked on such documents under proper
authentication and copies thereof retained for verification. However, AD
banks may also allow importers/exporters and special dispensation
entities to book forward contracts on the basis of declaration.
b) The maturity of the forward contract does not exceed the maturity of
the underlying transaction
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c) The currency of the forward contract and tenor are left to the choice of
the customer.
d) Where the exact amount of the exposure (underlying) is not
ascertainable, the contract is booked on the basis of reasonable
estimate (Past Performance Method).
e) Foreign Currency Loans/bonds will be eligible for hedging only after
final approval is accorded by RBI, wherever necessary or Loan
Registration Number (LRN) is given by RBI.
f) Global Depository Receipts (GDRs) and American Depository Receipts
(ADRs) will be eligible for hedge only after the issue price has been
finalized.
g) Balances in Exchange Earners Foreign Currency Accounts sold
forward by the customers shall remain earmarked for delivery and such
contracts shall not be cancelled. They may, however, be rolled-over.
h) All forward contracts with Indian Rupee as one of the currencies,
booked to cover exposures, falling due within one year, can be freely
cancelled and rebooked. All forward contracts, involving the Indian
Rupee as one of the currencies, booked by residents to hedge current
account transactions, regardless of tenor, may be allowed to be
cancelled and rebooked freely. This relaxation will not be applicable to
forward contracts booked on past performance basis without
documents as also forward contracts booked to hedge transactions
denominated in foreign currency settled in INR, where the current
restrictions will continue. All corporate exposures are required to be
reported and the facility of cancellation and rebooking should not be
permitted unless the corporate has submitted the required exposure
information.
i) Substitution of contracts for hedging trade transactions may be
permitted by an authorized dealer on being satisfied with the
circumstances under which such substitution has become necessary.
j) AD banks may also allow importers and exporters to book forward
contracts on the basis of a declaration of an exposure and based on
Past performance up to the average of the previous 3 financial years
(April to March) actual import/export turnover or the previous years
actual import/export turnover, whichever is higher, subject to:
i)

Forward Contracts

The forward contracts booked in the aggregate during the

year and outstanding at any point of time should not exceed
the eligible limit i.e. the average of the previous 3 financial
years or the previous years actual import/export turnover,
whichever is higher. Contract booked in excess of 75% of the
eligible limit will be on deliverable basis and cannot be
cancelled. These limits shall be computed separately for
import/export transactions.

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ii)

iii)

iv)

v)

vi)

vii)

Any forward contract booked without producing

documentary evidence at the time of booking (Past
Performance Method) will be marked off against this limit.
Importers and Exporters should furnish a declaration to the
AD Bank regarding amounts booked with other AD Banks
under this facility.
An undertaking may be taken from the customer to
produce supporting documentary evidence before the
maturity of the forward contract.
Outstanding forward contracts higher than 50% of the
eligible limit may be permitted by the AD bank only on being
satisfied about the genuine requirements of their constituents
after examination of the following documents;
a) A Certificate from the Chartered Accountant of the
customer stating that all guidelines have been adhered to
while utilizing this facility.
b) A Certificate of import/export turnover of the customer
during the past three years duly certified by their
Chartered Accountant/bank.
In the case of an exporter, the amount of overdue bills
should not be in excess of 10% of the turnover, to avail this
facility.
AD Banks to submit a monthly report (as on last Friday)
on the limits granted and utilized by their customers under
this facility to RBI.

Forward Contract to SMEs

AD Banks may allow Small and Medium Enterprises (SMEs) to book forward
contracts to hedge their direct and/or indirect exposures to foreign exchange risk
without production of underlying documents, subject to the following:
a) Such contracts may be allowed to be booked after ensuring that the entity
qualifies as SME as defined by Rural Planning and Credit Department of
RBI.
b) Such contracts may be booked through the AD Banks with whom the SMEs
have credit facilities and that the total amount of forward contracts booked
should be in alignment with the credit facilities availed by them for their
foreign exchange requirements or their working capital requirements or
capital expenditure.
c) These forward contracts may be allowed to be cancelled and rebooked
freely.
d) AD Banks should carry out a due diligence regarding user appropriateness
and suitability of the forward contracts to the SME customers. (Procedure
and format detailed elsewhere in this job card)

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e) The SMEs availing this facility should furnish a declaration to the bank
regarding the amounts of forward contracts already booked, if any, with
other Banks under this facility.

Forward Contract for Resident Individuals

AD Banks may allow individuals to book forward contracts to hedge their foreign
exchange exposures arising out of actual or anticipated remittances, both inward and
outward, without production of underlying documents, up to a limit of USD100,000/-,
based on self declaration and subject to the following conditions:
a) The contracts booked under this facility should normally be on a deliverable
basis. However, in case of mismatches in cash flows or other exigencies, the
contracts booked under this facility may be allowed to cancelled or re-booked.
b) The notional value of the outstanding contracts should not exceed
USD100,000/- at any time.
c) The contracts may be permitted to be booked up to tenors of one year only.
d) Such contracts may be booked through AD Banks with whom the resident
individual has banking relationship, on the basis of an application-cumdeclaration. The AD bank should satisfy themselves that the resident
individuals understand the nature of risk inherent in booking of forward
contracts and should carry out due diligence regarding user appropriateness
and suitability of the forward contracts to such customer.

Other Instructions
Forward Contract cancelled with one AD Bank can be rebooked with another AD
Bank subject to the following conditions:
i) The switch is warranted by competitive rates on offer, termination of banking
relationship with the existing bank with whom the original contract was
booked.
ii) The cancellation and rebooking are done simultaneously on the maturity date
of the contract.
iii) The responsibility of ensuring that the original contract has been cancelled
rests with the AD Bank who undertakes rebooking of the contract.
Residents having Overseas Direct Investments (in equity and loan) are permitted to
hedge the exchange risk arising out of such investments. AD Banks may book
forward contracts for hedging such investments subject to verification of exposure.
Contracts covering overseas direct investments can be cancelled or rolled over on
the due dates. However, AD Banks may permit rebooking only to the extent of 50%
of the cancelled contracts.

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If a hedge becomes naked in part of full owing to shrinking of the market value of the
investments, the hedge may continue to the original maturity. Roll over on due date
shall be permitted up to the extent of the market value as on that date.

Forward Contracts for Non Resident Individuals

AD Banks may enter into forward contracts with NRIs as per the following guidelines
to hedge:
a) The amount of dividend due to NRI on shares held in an Indian Company.
b) The Balances held in the Foreign Currency Non Resident Banks [FCNR(B)]
Account or the Non Resident External Rupee [NRE] account. Forward
contract with the Rupee as one of the legs may be booked against balances
in both the accounts. With regard to balances in FCNR(B) accounts, cross
currency (not involving the Rupee) forward contracts may also be booked to
convert the balances in one foreign currency to another foreign currency in
which FCNR (B) deposits are permitted to be maintained.
c) The amount of investment made under portfolio scheme in according with the
provisions of FERA, 1973 or under notifications issued thereunder or is made
in accordance with the provisions of the FEMA Regulations, 2000 as
amended from time to time and in both cases subject to the terms and
conditions specified in the provision to paragraph 1 above.

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Job Card (Fwd Contracts) No. 2

FORWARD CONTRACTS

OPERATIONAL MATTERS

Computation of Total Indebtedness

The exposures on account of Derivates and Foreign Exchange Forward Contracts
are to be taken into account for the purpose of computing Total Indebtedness.
Summary of the computation methodology is as under:
Credit equivalent (of a market related off-balance sheet transaction) = Current Credit
Exposure + Potential Future Credit Exposure
Current Credit Exposure = Sum of +ve mark-to-market (MTM) value of such
contracts, to be calculated periodically
Potential Future Credit Exposure = The notional principal amount of each of these
contracts (irrespective of whether the contract has a zero, +ve or ve MTM) X the
relevant credit conversion factor. The Credit conversion factor depends on the nature
and residual maturity.
Credit Conversion Factor (CCF) for market related off-balance sheet items
Residual Maturity
Credit Conversion Factors
Interest Rate Contracts
Exchange Rate Contracts
& Gold
One year or less
0.50%
2.00%
Over One year to Five
1.00%
10.00%
Years
Over Five Years
3.00%
15.00%

Setting up of Limits
A common Credit Exposure Limit (CEL) need to be set up for both Forward
Contracts and Derivatives. Credit Exposure Limit should normally be assessed and
sanctioned in conjunction with regular credit limits, as a part of regular appraisal. As
per RBI guidelines, the exposures under derivatives and forward contracts are
categorised under off-balance sheet exposures for capital adequacy norms and will
form part of total indebtedness of the customer. Consequently, Credit Exposure Limit
(CEL) set up for Forward Contracts/Derivatives should be grouped under Non-Fund
Based limits, as other off-balance sheet exposures such as LCs and BGs.
Credit Exposure Limits are set up by identifying the eligible notional exposure and
then applying Credit Conversion Factor (CCF) relevant for the maturity of deals
expected by the customer.
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As the forward contract and derivate exposures form part of total indebtedness, the
same would be calculated using Current Exposure (CE) method. Current Exposure
is sum of Current Credit Exposure (CCE) and Potential Future Exposure (PFE). CCE
is the sum of negative Marked to Market (MTM) valuations of the existing deals of
the customer on a given date. While computing CCE, positive MTMs arising out of
deals of the customer, if any, should not be netted off. PFE is calculated on the
notional of outstanding deals and residual maturity using credit conversion factors
applicable.
The total requirement of the client for various types of forward contracts and
derivates should be taken while fixing the limits. A Credit Exposure Limit to meet the
clients requirements may be sanctioned using the abovementioned conversion
factors.

Identifying Eligible Underlying Exposure

As per extant instructions, Banks are free to consider total Balance Sheet exposures
of customers including exposures of other banks and assess limits accordingly.
However, it should be ensured that no prior hedges exist on the said exposure.
Satisfactory evidence of the same should be obtained and placed on record.
a) Past Performance Basis (PP)
As per extant instructions, a customer can be sanctioned Forward Contracts and
Derivative limits based on past performance, up to average of the previous 3
financial years (April March) actual import/export turnover or the previous years
import/export turnover whichever is higher. Only revenue exposures of the customer
are covered under this component. Separate limits are to be computed for Imports
and Exports.
b) Documentary Evidence Basis (DE)
Revenue Exposures and other Balance sheet exposures such as Assets & Liabilities
are covered under this component. As per extant instructions, transactions can be
booked up to actual underlying, on production of underlying at the time of booking of
transactions. Size and tenor of the transactions should not exceed the underlying
produced. They can be freely cancelled and rebooked.
The above transactions can be booked with in overall Credit Exposure Limit only. In
respect of Swaps and other variants, both Interest Rate and Exchange Rate specific
component of CEL is arrived at and made available for appropriate exposures only.

Customer Appropriateness and Suitability Policy(CAS)

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Customer Appropriateness and Suitability Policy evaluates the customer on various

parameters and accords a rating A,B,C with varying product eligibility. As per the
policy, all customers who intend to enter into either forward contracts or other
derivative products. Based on their a) Financial Strength b) Corporate Governance
C) Operational Competence/Risk Management, the customer would be placed into
three categories (A/B/C). All products including forward contracts and other
derivative products would be classified in to three classes (1/2/3) based on complex
nature of the product, with simplest being class 1.
As per the policy, any class of products can only be offered to customers
corresponding to their category as per CAS.
Delegation of Powers
The scheme of delegation of powers for sanctioning these limits will be based on
total indebtedness. Deviations, if any, are to be approved by an authority at least one
level higher than the appropriate sanctioning authority.
Conduct of Limit:
Availability & Monitoring
Monitoring
Monitoring of the Forward Contracts/derivative limits and compliance of other
regulations in force is the responsibility of the operating unit. Once the overall
exposure limit for Forward Contracts & Derivatives is in place, the utilization from
each transaction can be marked off against such limits, using credit conversion
factors as and when a transaction is entered into with the client. In addition to this,
appropriateness of the transaction with the relevant exposure / underlying
considered in the sanction should be verified. Product appropriateness as per CAS
policy should be ensured.
Availability
The availability of limit would be computed taking into account the Current Credit
Exposure (CCE), the PFE on outstanding notional (i.e., Notional * CCF) . The
available limit at any point of time for further exposure would be as computed as
follows:
Available Limit = Total Limit- (PFE+CCE).
For any deviation / exceeding the limit necessary approvals from the appropriate
authority should be obtained. Irregularity reports, if any, should be submitted to the
appropriate authority as is being done for credit exposures.
In respect of both Forward Contracts & Derivatives, the operating unit would be
obtaining relevant proof of underlying / certifications / documentation in compliance
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of existing regulations / instructions as applicable to the transaction from the

customers. Proper records would be held by them for the purpose of RBI / Corporate
Centre / any other audit.
Security & Margin:
As per appraisal.
Documentation:
Standard documentation as per terms of sanction need be obtained along with other
credit documents at the time of sanction of limits.
A list of standard documents is as below:
a) ISDA Master Agreement
b) Schedule to ISDA agreement
c) Board Resolution duly authorizing the company and the authority structure for
concluding the FC/Derivative Deals.
d) Risk Policy of the Company
e) Telephonic Indemnity, if required, for direct access to dealing room
f) Arrangement letter, duly acknowledged by customer.
g) Risk disclosure statement.
Documents listed in general guidelines for each Forward Contract / Derivative
transaction should be obtained.
General Guidelines-Forward Contracts:
a. As the limit is assessed based on Current Exposure method using Credit
Conversion Factor, the monitoring of the limit availability would be based
on CE method.
b. Any Transaction done without production of actual underlying at the time of
booking would be marked off against the Past Performance (PP) eligibility
of the limit. In all such cases, proof of underlying has to be obtained before
maturity/ at the time of cancellation of the transactions. Transactions
booked in excess of 75% of the PP eligibility of the limit are only on
deliverable basis. Aggregate amount booked during the financial year not
to exceed the PP eligibility of limit. Total of all outstanding transactions
at any point of time should not exceed the CEL, in any case.
Importers and exporters should furnish a declaration to the
branches regarding amounts booked with other banks /branches
under this facility.

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c.

d.
e.

f.
g.

An undertaking may be taken from the customer to produce

supporting documentary evidence before the maturity of the forward
contract.
Outstanding forward contracts higher than 50% of the eligible limit
may be permitted by branches on being satisfied about the genuine
requirements of their constituents after examination of the following
documents:
i. A certificate from the Chartered Accountant of the customer
that all guidelines have been adhered to while utilizing this
facility.
ii. A certificate of import/export turnover of the customer during
the past three years duly certified by their Chartered
Accountant/bank.
Any transaction done based on production of underlying at the time of
booking of transaction, can be freely cancelled and rebooked, except long
term forward contracts ( beyond one year) having foreign currency / rupee
leg, which if cancelled cannot be rebooked.
For cross currency forward contracts (CCFCs), i.e., all Non-INR forward
contracts, can be freely re-booked on cancellation.
Stamped Forward Contract duly executed by customer should be
obtained by the operating unit along with relevant certifications, proof of
underlying etc
All other extant Bank / RBI instructions in respect of the conduct of
Forward Contract business should be complied with.
Wherever correspondence / confirmations are received from customer by
fax, Branch should also ensure obtention of the original documents from
the customer.

Alignment of Forward Contracts:

On implementation of Integrated Forex Module, it was envisaged that GMU-Kolkata
is not required to maintain separate records for Forward Contract portfolios of the
branches. The Trade Finance Department has made available on their web-site the
data on outstanding Forward Contracts as part of daily outstanding and SOD
reports which have to be downloaded by the respective branches to carry out SelfMonitoring.
At present. 7 days prior to the maturity date, constituents should be requested to
advise whether outstanding balance under forward contract will be utilized by them
or should be cancelled/rebooked at the expiry of the delivery period. The customer is
expected to either take delivery under the contract or cancel the same on or before
the maturity date.
Job Card (Fwd Contracts) No. 3

FORWARD PURCHASE CONTRACT

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JOB SET UP
On receipt of request for booking a purchase contract, ensure that the customer
submits one of the following documents:
a) Documentary evidence for booking purchase contract like Sale Contract,
Letter of Credit etc.
b) Exporter to confirm in writing that he has not booked any forward contract
against the same underlying.
c) In respect of Export Bills sent on collection basis, forward contracts can be
booked in the absence of the documentary evidence as export has already
taken place and documents are forwarded through us.
In the case of customers, forward contracts may be booked on the basis of
declaration of an exposure subject to sanction of limits.

Report the booking through EximBills and Mercury Fx.

Recover Contract Booking charges as per extant instructions.
Make a note on documentary evidence about the fact of booking contract
mentioning the contract number and other details.
Generate Contract note and forwarding letter
Have the Contract Note executed by the customer duly stamped.
File the duly executed contract note along with other papers relating to the
contract in sequential order for further verification/audit etc.
Generate SOD reports from Trade Finance website (http://10.0.20.206) to
verify the delivery date and take delivery.

Delivery of the contract to be done through Eximbills and Mercury Fx. (Please go
through the Eximbills and Mercury Fx Manuals for the procedure).
Ensure that no ready purchase is made against a transaction for which a forward
contract has been booked.

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Job Card (Fwd Contracts) No. 4

FORWARD SALE CONTRACT

JOB SET UP
When an application for booking the sale contract is received verify to ensure that
the importer has submitted one of the following documents:
a) Documentary evidence for booking sale contract.
b) An Irrevocable Letter of Credit opened by the Importer.
c) Importer to confirm in writing that he has not booked any forward contract
against the same underlying.
d) An Import Collection Bill received through the Branch payable at a future date.
e) The payment is towards repayment of a trade credit, foreign currency loan
etc.
In all above, ensure that import items are freely importable under the current Foreign
Trade Policy or importer holds a valid import licence.
If the payment is towards retirement of an import bill, ensure that the delivery period
is not beyond 180 days from the date of shipment as indicated either by the contract
or the letter of credit or collection documents. However, forward contracts can be
booked for periods beyond 6 months, where justified by the period of underlying
exposure.

Report the booking through EximBills and Mercury Fx.

Recover Contract Booking charges as per extant instructions.
Make a note on documentary evidence about the fact of booking contract
mentioning the contract number and other details.
Generate Contract note and forwarding letter
Have the Contract Note executed by the customer duly stamped.
File the duly executed contract note along with other papers relating to the
contract in sequential order for further verification/audit etc.
Generate SOD reports from Trade Finance website (http://10.0.20.206) to
verify the delivery date and take delivery.

Delivery of the contract to be done through Eximbills and Mercury Fx. (Please go
through the Eximbills and Mercury Fx Manuals for the procedure).
Ensure that no ready purchase is made against a transaction for which a forward
contract has been booked.

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Job Card (Fwd Contracts) No. 5

EARLY DELIVERY/ EXTENSION/

CANCELLATION OF FORWARD CONTRACTS
EARLY DELIVERY
Whenever the underlying transaction has to be put through earlier than the expected
date, customers takes delivery (Sale Contracts) or gives delivery (Purchase
contracts) earlier than the contracted date, in order to complete the transaction. This
will in effect amount to early delivery under the forward contract. Authorised Dealers
can allow such early deliveries provided the concerned customer agrees to make
good any exchange loss that may be incurred by the Bank while taking/making early
delivery under the contract. Thus a contract is allowed to be delivered/taken up at
the originally contracted rate and when the transaction is completed, the exchange
loss on account of swap difference if any, is calculated and recovered from the
customer. If the swap difference is favourable to the Bank, then the gain is passed
on to the customer. In addition, interest on outlay of funds is also recovered.
For Eg. An importer books a forward sale for USD100,000/- on 2 nd Jan with maturity
on 30th Jun @ 46.35. Customer requests for an early delivery of the contract on 1 st
May. The spot and forward differential for 30 th Jun on 1st May are 45.80/82 and 24/26
respectively
The bank while booking the original contract notionally would have bought a forward
purchase contract in the Inter Bank Market say @ 46.30.
The Swap or Exchange Differential on account of early delivery will be:
Bank carries Buy Sell Swap in this transaction.
Normal Pay off for the bank on 30 th June (On Account of Actual Delivery on Due
Date)
Receive USD 100,000/- from Inter Bank and Pay USD100,000/- to customer
Receive INR 46.35 lacs from customer and pay INR 46.30 in Inter Bank. (profit 0.05)
Now on account of early delivery on 1st May, the pay off for the bank on 1st May
Pay USD100,000/- to customer and Receive INR 46.35 lacs.
Buy USD100k from SPOT on 1st May @ 45.82 Gain of 0.53 lacs
Book another forward contract on 1st May for selling USD on 30th Jun @ 45.80+0.24
= 46.04
On 30th Jun pay off for the Bank will be as under.
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Receive INR 46.04

Pay INR 46.30 -- Loss 0.26 lacs
Net gain 0.53 0.26 0.05 (profit on original transaction) = 0.22 lacs passed on to
the customer
CANCELLATION OF FORWARD CONTRACTS
The forward contracts, whether purchase or sale, can be cancelled freely at the
option of the customer. Cancellation of contracts can thus take place prior to or on
the expiry date of the contract subject to the condition that in the absence of any
instruction from the customer, outstanding contracts shall automatically cancelled on
the due date. Such a contract can be rebooked with the authorized dealer provided
the customer produces suitable documentary evidence and subject to RBI FEMA
guidelines as stated elsewhere in this job card.
Cancellation of contracts involves either exchange of loss or profit. If a loss is
incurred, it is recovered from the customer. In case of profit, it is passed on to the
customer provided request for cancellation is received prior to the expiry of the
contract. When the contract is cancelled after due date, the customer shall not be
entitled to exchange difference, if any, in his favour, since the contract is cancelled
on account of his default and cancellation of contract after maturity/due date is to be
done at Card Rate. Sale and Purchase Contracts will be cancelled at TT Buying and
TT selling Rates respectively. Part cancellation of forward contract during its
currency is also permitted.

Procedural formalities
(For Eximbill and Mercury Fx related procedures, please refer to Eximbill and
Mercury Fx user manuals)
In view of the current market scenario, the instructions to pass on the exchange
differences (Loss or Profit) on cancellation of profit have been reviewed. It was
observed that exchange gains are being normally settled upfront and losses are
being settled on final maturity dates by the customers. It is also observed that large
amount of debits on account of exchange losses, on early cancellation of contracts,
are yet to hit customers accounts and the relative exposure is not accounted for,
thereby, exposing the bank to credit risk till the maturity date. In the circumstances, it
has been decided by the competent authority to stop this practice to eliminate such
credit risk.

Revised Instructions:
It has been decided that the Exchange Loss on cancellation of Forward Contracts
before the maturity date has to be invariably booked upfront i.e. on cancellation date.
The option to have settlement on maturity date, in case of losses, therefore, stands
withdrawn in respect of cancellation of forward contracts before maturity date. The
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amount to be recovered will be the loss incurred discounted at simple savings bank
rate for the intervening period.
However, if cancellation of forward contract before maturity date results in exchange
gain, the customer retains both the choices i.e. upfront settlement of exchange gain
at the discounted rate, as per the current instructions (discount being equal to PLR)
by choosing the settlement option today or settlement of full gain on the due date.
FEDAI GUIDELINES :
As per FEDAI guidelines, effective from April 2007, a grace period of 6 working days
(reduced from earlier 15 days) after maturity of the contract has been provided for
the Banks to reconcile the pipeline transactions. In any case, on the 7 th working day,
the branches have to automatically cancel the contract if not utilized for pipeline
transaction. For such cancellations after due date, the customer is not entitled to any
exchange gains while being liable for recovery of exchange loss.
However, we clarify that the grace period/cushion period given by FEDAI to banks is
only to reconcile pipeline transactions, if any. The contract may be also be cancelled
after the maturity date but before the 7th working day with specific understanding and
written request from the customer.
In all cases not involving pipeline transactions, branches are expected to cancel all
outstanding contracts latest by the 2 nd day after expiry of the contract. If such
contracts are not cancelled on 2nd working day, Branch should seek their controllers
specific approval for carrying the contracts further. Contracts having pipelines
transactions must be cancelled on the 7 th working day after expiry of contract. If such
contracts are not cancelled on the 7th working day, branch should seek specific
approval from their controllers for carrying the contracts further.
List of Overdue contracts in the Branch Books should be advised to the Controller,
on fortnightly basis, along with the reasons or approval, if any, given by controller.
Cancellation of forward contracts after maturity will be done at card rates irrespective
of the amounts.
In all cases of forward cover used to hedge the Foreign Currency Loans given to the
customers, the branches are expected to diarise and carry out the instructions for
utilization/cancellation/rollover without failure.

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Job Card (Fwd Contracts) No. 6

CROSS CURRENCY FORWARD CONTRACT (CCFC)

Basic Information
The customer could cover his forward risk exposure in Miscellaneous Foreign
Currency by booking forward contracts against the rupee in the particular currency.
The forward risk in such cases consists of two separate exchange risks - the risk of
the MFC against the US Dollar and the risk of the US Dollars against the rupee. As
the US Dollar is accepted worldwide as a medium of exchange and settlement for
transaction involving other currencies, any customer transaction in a MFC is covered
by the Bank through the US Dollar; the resultant US Dollar exposure is also
simultaneously covered.
For example, a sale of Euro to an importer against rupees can be dissected in the
following manner:
i. Bank sells Euro to importer customer
ii. Bank buys USD from him in exchange
iii. Bank sells back the USD to him
iv. Bank receives rupees from him
In a normal sale transaction only the first and last legs are visible because the bank
sells the Euro and receives the rupee. But the bank set the exchange rate for Euro
against the rupee and executes the customers order only through the intermediate
USD leg. So, there are two exposures, one is the Euro-USD exposure and other is
the USD-Rupee exposure, which are independent of each other. It is possible that
the customer does not feel threatened by the Euro-USD exposure while he is worried
about the USD-Rupee exposure or vice-versa.
Authorised Dealers now provide cross currency cover to customers i.e. the
customer can hedge the exchange risk in MFC according to his precise needs. In
such situation, the customer has the option to hedge himself against MFC-USD risk
and / or USD-Rupee risk. Thus, customers are enabled to cover their exchange risks
at both the stages in the transaction depending on his view about the future rate
movements. To facilitate better hedging opportunities to the holders of FCNR(B)
deposits, they are now allowed to book cross currency (i.e. not involving the rupee)
forward contracts to convert the balances in one foreign currency to another foreign
currency in which FCNR(B) deposits are permitted to be maintained. Such contracts,
once cancelled, are not eligible to be rebooked.
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The minimum amount of CCFC booking is USD 100,000 or its equivalent and
minimum delivery is equivalent to Rs.10 lacs. Customers are permitted to cover their
uncovered forward portfolio (i.e. uncovered leg) at a later date if they so desire. Also,
they are allowed to cancel any of the covered legs and rebook at a later date or
cancel both the legs.
For i and iii above, the Bank books CCFC in the MFC and USD at the appropriate
forward cross rate. For ii and iv, the bank books a CCFC in USD alone at the
appropriate forward rate. For all purposes this is like any other forward contract,
except that it is an adjunct to a CCFC.
Cross Currency Forward Contracts : Cancellation / Early Delivery
The cancellation and early delivery of CCFC is done as per extant rules and
regulations given in the FEDAI Rules. In respect of CCFC sales as well as purchase
where USD-Rupee leg is booked, the mechanism of the calculation are not, in any
way, different from the usual forward contracts. MFX system will calculate the
charges under IFM system, while Branch put through the cancellation transactions.
2. In respect of CCFC, where USD-MFC leg is booked, the calculation for
cancellation and early delivery is done with the dollar as the base currency instead of
Rupee. The calculations are therefore, based on USD-MFC cross rates. The gain or
loss arising from the exercise is arrived at in dollar terms. The rupee equivalent of
the dollar amount at current T.T. buying rate / T.T. selling rate should be paid to the
customer or recovered from him without passing any entries for the foreign currency
amount.
Branches should continue to refer to Treasury Mumbai all cases of cancellation /
early delivery in the usual manner.
FORWARD CONTRACT (FWCO)
Eximbills application supports Booking, Delivery and Cancellation of Normal Forward
Contracts (Sale & Purchase) and Cross Currency Forward Contracts through
Mercury Fx.
Booking of Ordinary Forward Contracts/ Booking of Cross Currency Forward
Contracts:
This function allows the user to book Sale and Purchase Forward Contracts (Normal
and Cross Currency).
Steps involved:

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Eximbills:
Navigation:
Forward Contract => A. Transaction Menu => 1. Booking => 01. Booking of Ordinary
Forward Contracts/ 02. Booking of Cross Currency Forward Contracts
Steps:
1.
2.
3.
4.

Login to Eximbills application

Open the required screen of the transactions.
Key-in the details of the transaction.
Eximbills application will generate an UNIQUE
reference number (Format of which is <5 digits Br. code>+<2 digits year>+2
Characters product code* + seven digits running serial number i.e.
0999908FS0000001)
* The product code in this module depends on the flags i.e. Type of Contract
Choice.
5.

Save the transaction in Eximbills with the key as encircled below.

Mercury Fx:
6.
7.

8.
9.

Login to Mercury Fx application for reporting the transaction and taking rate.
Fetch the details of the transaction in Mercury Fx with appropriate Transaction
Type.
a. FP - Forward Purchase Booking
b. FS - Forward Sale Booking
c. XP- Cross Currency Forward Purchase Booking
d. XS- Cross Currency Forward Sale Booking
Take the rate depending upon the amount of Booking (Card Rate, Online Rate
or Dealer).
Once the Rates are obtained Click on Update button to send the information
to Eximbills.

Eximbills:
Navigation:
Forward Contract => A. Transaction Menu => 4. Common Process => 01. Continue
Saved Pending
Steps:
10.
11.

Login to Eximbills Application.

Open the transaction in Common Process, Continue Saved Pending, check
for the details from Mercury Fx like. Rate of Booking, Amount in INR, Mercury
Reference Number etc and confirm the transactions with the key as encircled
below.

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12.
13.

Login to Eximbills with Supervisor ID to release the transaction

Release the transaction in Eximbills with appropriate level of ID for posting the
voucher in Banks after properly checking the transaction and its voucher with
the button as shown below.

.
14.

Check the various accounts in Banks to confirm the accounting entries in

various accounts of the customer and the branch with the key as encircled
above.

Cancellation of Normal Forward Contracts /Cancellation of Cross Currency

Forward Contracts:
This function allows the user to Cancel Sale and Purchase Forward Contracts
(Normal and Cross Currency).
Steps involved:
Eximbills:
Navigation:
Forward Contract => A. Transaction Menu => 2. Cancellation=> 01. Cancellation of
Normal Forward Contracts / 02. Cancellation of Cross Currency Forward Contracts
Steps:
1.
2.
3.
4.
5.
6.
7.

Login to Eximbills Application.

Open the transaction catalog.
Key-in the Reference number of the Forward Contract to be Cancelled
Select the transaction and continue to open the screen of the transactions.
Key-in the details of the transaction.
Save the transaction in Eximbills with the key as shown earlier.
Logoff from Eximbills application.

Mercury Fx:
8.
9.

Login to Mercury Fx application for reporting the transaction and taking rate.
Fetch the details of the transaction in Mercury Fx with appropriate Transaction
Type.
a. FPC - Forward Purchase Cancellation
b. FSC - Forward Sale Cancellation

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10.
11.
12.

c. XPC- Cross Currency Forward Purchase Cancellation

d. XSC- Cross Currency Forward Sale Cancellation
Take the rate depending upon the amount of Booking (Card Rate, Online Rate
or Dealer).
Once the Rates are obtained Click on Update button to send the information
to Eximbills.
Logoff from Mercury Fx application.

Eximbills:
13.
14.

15.
16.
17.
18.

Login to Eximbills Application.

Open the transaction in Common Process, Continue Saved Pending, check
for the details from Mercury Fx like. Rate of Booking, Amount in INR, Mercury
Reference Number etc and confirm the transactions with the key as shown
earlier..
Login to Eximbills with Supervisor ID to release the transaction
Release the transaction in Eximbills with appropriate level of ID for posting the
voucher in Banks after properly checking the transaction and its voucher as
shown eariler.
Check the various accounts in Banks to confirm the accounting entries in
various accounts of the customer and the branch.
Logoff to Eximbills Application.

Delivery of Ordinary Forward Contracts/ Delivery of Cross Currency Forward

Contracts:
This function allows the user to Deliver Sale and Purchase Forward Contracts
(Normal and Cross Currency).
Steps involved:
Eximbills:
Navigation:
Forward Contract => A. Transaction Menu => 3. Delivery => 1. Delivery of Purchase
Forward Contract / 2. Delivery of Sale Forward Contract / 3. Delivery of Cross
Currency Forward Contract
Steps:
1.
2.
3.
4.
5.

Login to Eximbills Application.

Open the required screen of the transactions.
Key-in the details of the transaction.
Save the transaction in Eximbills with the related Bill/ Payment Reference
number with the key as shown earlier.
Logoff from Eximbills application.

Mercury Fx:
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6.
7.
8.
9.
10.
11.
12.

Login to Mercury Fx application for reporting the transaction and taking rate.
Fetch the details related Bill/ Payment Reference number of the transaction in
Mercury Fx with appropriate Transaction Type.
Once the bill details are fetched, click on utilize button.
Key in the Forward Contract Reference number, and click on fetch to utilize
the contract.
Key in the amount to be utilized for the Bill/ Payment.
After utilizing go for the Ready Rate / PCFC Utilization if any.
Once the Rates are obtained Click on Update button to send the information
to Eximbills.

Eximbills:
Navigation:
Forward Contract => A. Transaction Menu => 4. Common Process => 01. Continue
Saved Pending
Steps:
13.
14.
15.
16.
17.
18.

Login to Eximbills Application.

Open the transaction in Common Process, Continue Saved Pending, check for the
details from Mercury Fx like. Rate of Booking, Amount in INR, Mercury Reference
Number etc and confirm the transactions with the key as shown earlier.
Login to Eximbills with Supervisor ID to release the transaction
Release the transaction in Eximbills with appropriate level of ID for posting the
voucher in Banks after properly checking the transaction and its voucher as shown
earlier.
Check the various accounts in Banks to confirm the accounting entries in various
accounts of the customer and the branch with the key as encircled above.
Logoff to Eximbills Application.

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Job Card (Fwd Contracts) No. 7

FOREIGN CURRENCY RUPEE OPTIONS

BASIC INFORMATION
Cross-currency options as derivative products were earlier available in the Bank.
These options were previously being sold to customers by authorized branches on
fully hedged basis by buying contra options from our foreign offices.
Currency Option: It gives the buyer the right but not the obligation to buy or sell a
specific quantity of a currency at an agreed rate on or before a particular date. The
option buyer pays the seller a premium for the privilege of being able to buy or sell
the currency at a pre-fixed price, without having the commitment to do so.
Holder: Buyer of the option.
Writer: Option seller is called the writer.
Put Option: It gives the buyer of the option the right to sell a specified quantity of a
currency on or before a particular date at an agreed rate.
Call option: It gives the buyer of the option to buy a specified quantity of a currency
on or before a particular date at an agreed rate.
Premium: Price paid by the buyer to the seller for the option.
Strike price/exercise rate: Rate at which option may be exercised.
Expiry date: Final date on which the option can be exercised.
European Option: This option can be exercised only on the expiry date.
American Option: This option can be exercised at any date on or before the expiry
date.
DESIGNATED BRANCHES
GMU will designate the branches who can undertake the Option transactions for the
customers.

LINKED BRANCHES
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The branches other than the designated branches are referred to as Linked
Branches. The customers of these linked branches can deal in options through the
designated branches.
ELIGIBLE CUSTOMERS
(i) Clients having high credit rating and good relationship with the Bank (Minimum
internal rating SB-5 new) are eligible. In respect of corporate customers the
minimum credit rating required is SB-7(NEW). For customers below the above
rating specific approval of the Board would have to be sought.
(ii) The customers should have been maintaining an account with the Bank for the
last two years and conduct of the account should have been satisfactory.
(iii)

Corporates should undertake these transactions to hedge their own balance

sheet exposures. Branches should exercise due diligence to ensure this aspect.

RISK EXPOSURE ON CUSTOMERS

a)

Where customer is the buyer of the option, there is risk of failure of the
Customer to pay Premium on Spot Date. Branches should therefore have
adequate credit limits for the customer to cover the premium amount.

b) Where customer is the seller of the option (in case of cost reduction structures),
there is risk of failure of the customers to deliver on his obligations to pay the net
cash settlement under the Options Contracts, when exercised by the Bank.
c) Customer-wise option contract limits may be fixed by branches and these limits
will not be treated as non-fund based exposures and will not form part of total
indebtedness of the customers.
d) The exposure on account of options would be calculated on the basis of credit
conversion factor methodology as per RBI instructions from time to time.
e) The limits for the options will be assessed separately and not in conjunction with
appraisal of normal credit facilities. The scheme for delegation of powers for
sanctioning these limits will be the same as per forward contracts.
FORMALITIES TO BE COMPLETED BY THE CUSTOMER
(i) Corporates are required to furnish a certificate from the authorised signatories
that the transactions have been undertaken to hedge their balance sheet
exposures and the size and tenor of the transactions undertaken are not in
excess of the underlying exposure.

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(ii) The customer has to sign a format having understood the terminologies
associated with currency option transactions and the nature of the product
including its inherent risks.
OPERATING PROCEDURE - BOOKING OPTION DEALS BY BRANCHES:
a)
The deal can be undertaken only by the designated branches. Other branches
should approach the Banks Treasury Department at Mumbai through the designated
branches only. All requests for derivative deals should be conveyed in writing (by fax)
to the Derivatives Desk of Treasury Dealing Room at Mumbai. The request should
specify the name of the corporate, notional amount, nature of the deal, etc. and
should be duly signed, along with the name and S.S. No. by the authorized
signatory. On receipt of request from the designated branch, the Derivative Desk
dealer(s) would independently contact the branch concerned and verify details of the
proposed deal and record the same.
b) If the price (strike price, premium) is acceptable to the customer, the deal would
be confirmed online and Dealing Room would undertake necessary cover
operations in the market.
c) No accounting entries for Options need be passed at branches. The only entries
that will be passed at the Branches will be for remittance of the premium and net
cash settlement amounts with the customers.
d) Dealing Room will quote the Premium separately for each contract even if the
contract is part of a cost reduction structure.
e) All the necessary details needed for the confirmation of the contract with the
customer will be exchanged between the Dealing Room and the reporting
Branch. A unique reference no. is given for each structure and distinctive
reference nos., are given for the options making up the structure (building
blocks).
f) Initially the branches will offer only plain Vanilla European Options.
g) Customers can also enter in to packaged products involving cost reduction
structures (such as buying a call option and selling a put option) provided the
structure does not increase the underlying risk and does not involve customers
receiving premium.
h) Writing of options as such (without packaged products) by customers is not
permitted by RBI.
i)

As the customers are not permitted to be net receivers of premium under the
current RBI directives, there will be no situation where Branches will have to pay

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premium to the customers. Branches would only collect premium from the
customers and remit the same to GMU, Kolkata. Branches would collect the net
premium on spot date (on T+2) for each structure from the customer and remit
the premium to GMU, Kolkata through CBS. Premium for each structure would
be sent as a separate entry and the accompanying schedule should contain the
premium paid/received on each individual option included in the structure. Even if
the structure is a zero cost Option (such as buying a call option and selling a put
option), where no premium is to be received from the customer, the Branch will
need to send to GMUK the details of premium paid/received on each individual
option included in the structure by fax. Margin charged by the branch, if any, over
the option premium quoted by Dealing Room, may be credited by the branch to
their Exchange Account, on the day of recovery of the premium.
j)

No accounting entries need to be passed at the branch on deal date for premium
recoverable, as these entries will be passed at GMU, Kolkata. The premium
recoverable from the customer on Premium Settlement Date (T+2) may be
recorded in a register on the day of the Deal and the amount remitted to GMUK
through CBS. As no screens are available in CBS for this kind of entry, manual
vouchers may be put through.

k) Branches would report to GMUK the details of option transactions concluded with
Dealing Room in the same format on which the details of the deal were settled
between the Branch and Dealing Room, Treasury using the same reference no.
given by Treasury to enable GMUK to match the same against the related cover
deal done by the Dealing Room.
l)

Branches would keep a record of all the options done by them structure wise, to
ensure that no Option which is part of a structure is cancelled separately.

DOCUMENTS
The undernoted documentation should be obtained by authorised/linked Branches
from customers proposing to Deal in Options with the Bank:
i.

ISDA Master Agreement

ii.

Schedule To ISDA Master Agreement

iii.

A request letter from the Customer to the Branch together with the details of
the underlying exposure

iv.

Confirmation of Options Contract.

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OPERATING PROCEDURE - EXERCISE OF OPTION AND SETTLEMENT

a) Branches would diaries the expiring options contracts. FEDAI publishes
benchmark Spot Exchange Rates for Option settlement at 11.30 IST (Tokyo Cut)
on their page INVOLFIX. Branches shall compare the Strike Prices of the
expiring options with the FEDAI published rates and decide whether the expiring
option is in the money.
b) For Options sold by the Bank to the customers that are in the money (in case of
call option if the spot price is more than strike price) at the time of Tokyo-Cut,
these are expected to be exercised, even if the customer does not formally
intimate the Branch. However, Branches shall ascertain customers intention to
exercise the option within reasonable time (not later than the close of business on
expiry date of the Option) and inform the Dealing Room, Treasury and GMU,
Kolkata. For Options bought by the Bank from the customers which are in the
money, Branches shall send a formal communication to the customer about the
Banks intention to exercise the Option immediately after Tokyo-Cut is published
(at 11.30 IST on expiry date). The initial communication will be over phone
followed by a letter (faxed and confirmation copy mailed to the customer).
c) For Options bought by the Bank from customers, the exercise would only be on
net cash settlement basis. Branches would recover the difference between the
FEDAI published rates and strike price and remit the same to GMU, Kolkata on
settlement date through CBS, giving the related Option reference nos.
d) In terms of extant RBI instructions, only net cash settlement is allowed on
Options sold to customers. Net cash settlements mean the settlements of difference
between the strike price and reference rate of FEDAI on exercise/expiry date as
published in Reuters page INVOLFIX. As only net cash settlements are permitted
for contracts entered into with customers, there will be no occasion where branches
will have to settle any contracts through full delivery. Branches would debit GMU,
Kolkata through CBS and pay the settlement amount to the customer exercising the
Option. Customers must be properly advised that settlement will be on net basis and
as such they should cover their exposure on spot basis in the market, separately.
LIQUIDATION OF THE CONTRACTS
a)
Customers are permitted to liquidate Option contracts before expiry. However,
if an individual Option contract is part of a cost reduction structure, the entire
structure has to be liquidated (cancelled) to eliminate the possibility of customers
using this route to receive net premium. In other words, a structured Option product
cannot be liquidated in parts.

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b) Liquidation is equivalent to reversal of the original contract. Customers will sell

back the contracts, purchased by them from the Bank, to the Bank for remaining
tenor of the option.
c) The procedure outlined above for obtaining quotes from Dealing Room, Treasury
shall also apply to liquidation..
d) While reporting these transactions to GMU, Kolkata, Branches shall report them
as cancellation of initial Options/Structures citing reference no. of the original
contracts. Branches shall record the Deal using the same Deal Confirmation
format used for recording new deal with the legend CANCELLATION. The
reference no. would be the original unique reference no., but the particulars used
will be the terms of liquidation of contract. Where the original contract was a
bought/purchase contract, Bank would be the seller of Option for the remaining
tenor of the Option and therefore, receiver of premium on liquidation. Where the
original contract was a sold contract, Bank would be buyer of the Option for the
remaining tenor and therefore, payer of premium on liquidation. The liquidation
Deal Confirmation would contain all the details of the original deal with the
exception that the Premium Column will be filled with the liquidation price
REPORTING
Branches are required to report to RBI on a weekly basis the option transactions
undertaken as per the format furnished below:
Option Transaction Report for the week ended__________________

Sr.
no

Trade
date

Client/
Cparty
Name

Notiona
l

Option
Call/Pu
t

Strike

Maturit
y

Premiu
m

Purpose
*

*Mention balance sheet, trading or client related.

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