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    FEC Contracts

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    satyambhandu
    Forward exchange contracts (FECs) allow parties to secure an exchange rate for a future transaction occurring within 12 months. There are different types of FECs depending on which currency leg is covered. Considerations for the type of contract include payment dates and currency premiums/discounts. FECs can be delivered early via swap contracts or have their maturity extended again through swaps. Outstanding FEC amounts must be surrendered at current spot rates if cancelled, potentially resulting in losses. FECs provide price certainty but limit ability to benefit from favorable exchange rate movements. Additional administration is required for early deliveries, extensions, surrenders or cancellations.

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    FEC Contracts

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    satyambhandu
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    Forward exchange contracts (FECs) allow parties to secure an exchange rate for a future transaction occurring within 12 months. There are different types of FECs depending on which currency leg is covered. Considerations for the type of contract include payment dates and currency premiums/discounts. FECs can be delivered early via swap contracts or have their maturity extended again through swaps. Outstanding FEC amounts must be surrendered at current spot rates if cancelled, potentially resulting in losses. FECs provide price certainty but limit ability to benefit from favorable exchange rate movements. Additional administration is required for early deliveries, extensions, surrenders or cancellations.

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    Forward exchange contracts (FECs) allow parties to secure an exchange rate for a future transaction occurring within 12 months. There are different types of FECs depending on which currency leg is covered. Considerations for the type of contract include payment dates and currency premiums/discounts. FECs can be delivered early via swap contracts or have their maturity extended again through swaps. Outstanding FEC amounts must be surrendered at current spot rates if cancelled, potentially resulting in losses. FECs provide price certainty but limit ability to benefit from favorable exchange rate movements. Additional administration is required for early deliveries, extensions, surrenders or cancellations.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    132 views2 pages

    FEC Contracts

    Uploaded by

    satyambhandu
    Forward exchange contracts (FECs) allow parties to secure an exchange rate for a future transaction occurring within 12 months. There are different types of FECs depending on which currency leg is covered. Considerations for the type of contract include payment dates and currency premiums/discounts. FECs can be delivered early via swap contracts or have their maturity extended again through swaps. Outstanding FEC amounts must be surrendered at current spot rates if cancelled, potentially resulting in losses. FECs provide price certainty but limit ability to benefit from favorable exchange rate movements. Additional administration is required for early deliveries, extensions, surrenders or cancellations.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
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    Forward exchange contracts (FEC)

    Forward exchange contracts are used to secure a rate today for settlement at some time in future, usually longer than two business days. In this document we will take a look at the different types of cover, factors to consider when selecting a contract type, as well as the various methods of delivery that can take place with a FEC. These are: early delivery, extension and cancellations or surrenders.

    Types of cover
    There are two distinct legs (transactions) in any rand / foreign currency deal. The importer / exporter can cover either one of the two legs of the transaction, or both of them, depending on the clients view of the currency market. The client can opt for: - Foreign currency / dollar cover (thereby leaving the rand / dollar leg uncovered) - Rand / dollar cover (thereby leaving the foreign currency / dollar leg uncovered) or - Rand / foreign currency cover (thereby eliminating the entire currency risk) A customer wanting to enter into a forward exchange contract must state what type of contract is required and what type of cover is needed.

    Considerations when selecting the type of contract:


    - Is the payment / accrual date of the underlying commitment determinable, or is there some uncertainty? - What are the terms and conditions of the underlying contract of sale and is there any uncertainty regarding the adherence to manufacturing / delivery dates which in turn will have a bearing on payment / accrual dates? - Is the currency quoted at a premium or discount? - Is it likely that the premium / discount will increase / decrease during the life of the contract?

    Forward exchange contracts Early delivery


    An early delivery is when a forward exchange contract is used before the maturity date of a fixed contract OR during the fixed period of a partially optional contract. Delivery will take place on a swap basis. To understand a swap transaction, consider the following example: A person invests money on fixed deposit with the bank for six months. After three months, that person needs the money on fixed deposit. But, the bank cannot release the money under a fixed deposit, so it then arranges for a loan for three months to help that client. On maturity of the fixed deposit, the proceeds are used to offset the three-month loan. The client will either have to pay or receive the difference in the interest between the overdraft rate and the fixed deposit rate. Swap contracts operate on a similar basis. The importer needs to make a payment but is unable to use the contract because of the fixed period. To assist the client, the bank provides the foreign currency converted at the current ruling rate of exchange. The forward contract therefore remains unused and is surplus to requirements. To eliminate the surplus funds, the bank enters into a contra (swap) contract to buy back (offset) the amount on the maturity date of the original contract.

    Forward exchange contracts Extension


    On occasions, payment is delayed owing to late arrival of documents or other mishaps. When payment or receipt of funds is deferred for any reason, the maturity date of the forward contract has to be extended. This is also done by means of a swap. The importer must fulfil his obligation under the existing contract, that is he will receive the foreign currency against the settlement in rand at the forward contract rate. As the importer has no foreign currency commitment at this time, he must sell the foreign currency to the bank at the spot (current) rate of exchange. At the same time, and based on the same spot rate, the bank will provide a fresh forward contract to the new maturity date. The exporter must fulfil his obligation under the existing contract by selling the foreign currency to the bank against settlement in rand at the forward contract rate. He will but the foreign currency from the bank at the spot (current) rate of exchange, as there is no foreign currency accrual. He will obtain a fresh forward contract, to the new maturity date, based on the same spot buying exchange rate. Please note (using the case of the importer as an example): - The difference in exchange between buying the foreign currency at the forward contract rate and selling the currency at the spot rate of exchange is not a profit or loss in exchange, but is merely a prepayment to or an advance by the bank. - The importer does not lose the benefit of the rate of exchange on which the original contract is based.

    Forward exchange contracts


    - Cancellations or Surrenders In the event of an importer being unable to use the forward exchange contract, in whole or in part, the outstanding balance is surrendered by settlement for the difference in exchange between: - The forward contract rate, and - The current days spot telegraphic buying rate of exchange

    If an order is cancelled, the forward exchange contract must be cancelled at the prevailing spot exchange rate, which can result in financial loss.

    Forward exchange contracts Advantages


    Forward exchange contracts offer the following advantages: - They cater for a diverse type of commercial and financial transactions and both importers and exporters can make use of it. - The company is protected against unfavourable exchange rate fluctuations. - The exact value of the export and import order can be calculated on the day it is processed. - Budgeting and costing are accurate.

    Forward exchange contracts Disadvantages


    - Once a company has covered a transaction with a forward foreign exchange contract, it cannot take advantage of preferential exchange rate movements. - If an order is cancelled or there is any surplus amount outstanding on a forward exchange, it must be surrendered at the prevailing spot exchange rate, which can result in a financial loss. - Early deliveries, extensions, surrenders and cancellations during the fixed period of a forward exchange contract are done on a swap basis causing additional administration.

    Forward exchange contracts Exchange control requirements


    The South African exchange control authorities allow banks to enter into FECs subject to the following conditions: - A firm and ascertainable foreign exchange commitment must exist. For example, a commitment to pay for imports - The transaction is permitted in terms of the exchange control rulings or a specific authority has been granted by the authorities for the transaction - The period of cover does not exceed 12 months at a time - The commitment is not already covered - Documentary evidence of the commitment is presented to the bank within 14 days of establishment of the FEC.

    Contact details
    For further information on any of our products or services: Forex Relationship Centre Corporate and Investment Banking Division Standard Bank Toll Free Tel: 08000-FOREX Fax: 011 378 8060 email: [email protected] www.standardbank.co.za

    Disclaimer
    This document does not constitute an offer, or the solicitation of an offer for the sale or purchase of any investment or security. This is a commercial communication. If you are in any doubt about the contents of this document or the investment to which this document relates you should consult a person who specialises in advising on the acquisition of such securities. While every care has been taken in preparing this document, no representation, warranty or undertaking (express or implied) is given and no responsibility or liability is accepted by Standard Bank Group Limited, its subsidiaries, holding companies or affiliates as to the accuracy or completeness of the information contained herein. All opinions and estimates contained in this report may be changed after publication at any time without notice. Members of Standard Bank Group Limited, their directors, officers and employees may have a long or short position in currencies or securities mentioned in this report or related investments, and may add to, dispose of or effect transactions in such currencies, securities or investments for their own account and may perform or seek to perform advisory or banking services in relation thereto. No liability is accepted whatsoever for any direct or consequential loss arising from the use of this document. This document is not intended for the use of private customers. This document must not be acted on or relied on by persons who are private customers. Any investment or investment activity to which this document relates is only available to persons other than private customers and will be engaged in only with such persons. In European Union countries this document has been issued to persons who are investment professionals (or equivalent) in their home jurisdictions. Neither this document nor any copy of it nor any statement herein may be taken or transmitted into the United States or distributed, directly or indirectly, in the United States or to any U.S. person except where those U.S. persons are, or are believed to be, qualified institutions acting in their capacity as holders of fiduciary accounts for the benefit or account of non U.S. persons; The distribution of this document and the offering, sale and delivery of securities in certain jurisdictions may be restricted by law. Persons into whose possession this document comes are required by Standard Bank Group Limited to inform themselves about and to observe any such restrictions. You are to rely on your own independent appraisal of and investigations into (a) the condition, creditworthiness, affairs, status and nature of any issuer or obligor referred to and (b) all other matters and things contemplated by this document. This document has been sent to you for your information and may not be reproduced or redistributed to any other person. By accepting this document, you agree to be bound by the foregoing limitations. Unauthorised use or disclosure of this document is strictly prohibited. Copyright 2004 Standard Bank Group. All rights reserved.

    Authorised financial services and registered credit provider (NCRCP15) The Standard Bank of South Africa Limited (Reg. No. 1962/000738/06). SBSA 803129-E 03/09

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