MOHAMMAD BADRUL ALAM

SENIOR OFFICER
AGRANI BANK LTD
RAJBARI BR., RAJBARI
CELL NO-01725308970
FACEBOOK-MB ALAM ARIF
Sheet no-1

International trade and foreign exchange

1. 1.briefly describe foreign excahage and foreign trade.

2.What are the reasons behind foreign trade
3. State the importance of foreign trade
4. Disadvantage of foreign trade
5.Why need currency exchange /The Reason for foreign exchange
6.The points below highlight the importance of international trade
7.What do you mean by Exchange Position
8.What are the elements of foreign exchange?
9.sources of demand and supply of foreign exchange.
12.Define Foreign Exchange Market And Discuss Tne Main Characteriscis Of Foreign
Exchange Marketjune/13
13.Functions of Foreign Exchange Market:-
1. 1.briefly describe foreign excahage and foreign trade.
2.What are the reasons behind foreign trade
3. State the importance of foreign trade
4. Disadvantage of foreign trade
5.Why need currency exchange /The Reason for foreign exchange

Foreign Exchange

1. 1.briefly describe foreign excahage and foreign trade.

International trade----
International trade is the exchange of capital, goods, and services across international
borders or territories. In most countries, such trade represents a significant share of gross
domestic product (GDP). While international trade has been present throughout much of
history, its economic, social, and political importance has been on the rise in recent centuries.
International trade is controlled by ministry of commerce

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Industrialization, advanced transportation, globalization, multinational corporations,
and outsourcing are all having a major impact on the international trade system. Increasing
international trade is crucial to the continuance of globalization. Without international trade,
nations would be limited to the goods and services produced within their own borders.
What is foreign exchange
Foreign exchange, or Forex, is the conversion of one country's currency into that of another.
In a free economy, a country's currency is valued according to factors of supply and demand.
In other words, a currency's value can be pegged to another country's currency, such as the
U.S. dollar, or even to a basket of currencies. A country's currency value also may be fixed
by the country's government. However, most countries float their currencies freely against
those of other countries, which keeps them in constant fluctuation.
Foreign Exchange is controlled by ministry of Finance.
The value of any particular currency is determined by market forces based on trade,
investment, tourism, and geo-political risk. Currency exchange for tourist visits is one of the
demand factors for a particular currency. Another important factor of demand occurs when a
foreign company seeks to do business with a company in a specific country.
Foreign exchange is handled globally between banks and all transactions fall under the
auspice of the Bank of International Settlements.
2.What are the reasons behind foreign trade
Any country of the world is not selfdepended.no country can produce kinds of goods to
cover all types of demand of its people. It occurs due to Natural environment, richness of
wealth, labour classification and specialization.foreign trade also occur for some other
reasons those are discussed below-
1.Environmental discriminationproduction of some special product is easi in definite
country and area due to environmental discrimination.as a result they produce that particular
product and export surplus part after their demand.
2.dynamics of production factors-diferent production material such as land, labour, capital,
organization etc are the main cause of foreign trade.
3.market system-different types of market system are used in the world.some of them are-
socialism market, capitalization market,open market, controlled market etc. as a result
foreign trade is operated depending on socio-economic culture and market infrastructure of
that country.
4. technological experience-developed country export their new technology and inventory to
other countries that occur foreign trade.
5. easy availability of capital
6.difference in product quality and price.
7.efficiency of manpower.
8. different kinds of natural resources .

3. State the importance of foreign trade.---

Every country of the world export his surplus part of production to other country and import
deficient product from another country. country involved in export-import business take this
facility from foreign trade.the benefits or advantages of foreign trade are discuss below-
1.opportunity to export surplus production.
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2.facility to consume unproduced or deficit goods.
3. labour specialization.
4.increaseing worldwideproduction and consumption.
5.advantage of consuming goods at low cost.
6.exchange and development of knowledge and culture.
7.increasing international co-operation.
8.ensuring optimum use of natural resources
9.reducing the wastage of factors of production.
10.transfer of new technology and invention.
4. Disadvantage of foreign trade
1. Increasing dependency
2. Reducing the stock of natural resources.
3. Increasing import of unnecessary and harmful goods.
4. Problem arising from excess production.
5. Unjustified competition.
6. Barries to indigenous industry promotion.
7. Threat to national independence and sovereign.
8. Creation of international conflict.
5.Why need currency exchange /The Reason for foreign exchange:-----
Foreign exchange, or Forex, is the conversion of one country's currency into that of another.
In a free economy, a country's currency is valued according to factors of supply and demand.
In other words, a currency's value can be pegged to another country's currency, such as the
U.S. dollar, or even to a basket of currencies. A country's currency value also may be fixed
by the country's government. However, most countries float their currencies freely against
those of other countries, which keeps them in constant fluctuation.
The value of any particular currency is determined by market forces based on trade,
investment, tourism, and geo-political risk. Every time a tourist visits a country, for example,
he or she must pay for goods and services using the currency of the host country. Therefore,
a tourist must exchange the currency of his or her home country for the local currency.
Currency exchange of this kind is one of the demand factors for a particular currency.
Another important factor of demand occurs when a foreign company seeks to do business
with a company in a specific country. Usually, the foreign company will have to pay the
local company in their local currency. At other times, it may be desirable for an investor
from one country to invest in another, and that investment would have to be made in the
local currency as well. All of these requirements produce a need for foreign exchange and
are the reasons why foreign exchange markets are so large.
Foreign exchange is handled globally between banks and all transactions fall under the
auspice of the Bank of International Settlements.

6.The points below highlight the importance of international trade:-

1) Earn foreign exchange: International trade exports its goods and services all over the
world. This helps to earn valuable foreign exchange. This foreign exchange is used to pay for
imports. Foreign exchange helps to make the trade more profitable and to strengthen the
economy of its country.
2) Optimum utilization of resources : International trade makes optimum utilisation of
resources. This is because it produces goods on a very large scale for the international
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market. International trade utilizes resources from all over the world. It uses the finance and
technology of rich countries and the raw materials and labour of the poor countries.
3) Achieve its objectives: International trade achieves its objectives easily and quickly. The
main objective of an international trade is to earn high profits. This objective is achieved
easily. This it because it uses the best technology. It has the best employees and managers. It
produces high-quality goods. It sells these goods all over the world. All this results in high
profits for the international trade.
4) To spread trade risks:International trade spreads its trade risk. This is because it does
trade all over the world. So, a loss in one country can be balanced by a profit in another
country. The surplus goods in one country can be exported to another country. The surplus
resources can also be transferred to other countries. All this helps to minimize the trade risks.
5) Improve organizations efficiency: International trade has very high organisation
efficiency. This is because without efficiency, they will not be able to face the competition in
the international market. So, they use all the modern management techniques to improve
their efficiency. They hire the most qualified and experienced employees and managers.
These people are trained regularly. They are highly motivated with very high salaries and
other benefits such as international transfers, promotions, etc. All this results in high
organisational efficiency, i.e. low costs and high returns.
6) Get benefits from Government: International trade brings a lot of foreign exchange for
the country. Therefore, it gets many benefits, facilities and concessions from the government.
It gets many financial and tax benefits from the government.
7) Expand and diversify: International trade can expand and diversify its activities. This is
because it earns very high profits. It also gets financial help from the government.
8) Increase competitive capacity: International trade produces high-quality goods at low
cost. It spends a lot of money on advertising all over the world. It uses superior technology,
management techniques, marketing techniques, etc. All this makes it more competitive. So, it
can fight competition from foreign companies.

7.What do you mean by Exchange Position

Foreign exchange position the balances of bank foreign exchange assets andliabilities that
generate the risk of obtaining additional revenues or expendituresupon the modification of
exchange rates.
The foreign exchange position shall be considered open if foreign exchangeassets in a
certain foreign currency are not equal to foreign exchange liabilities inthe respective foreign
currency.
The value of the open foreign exchange position represents the differencebetween the
amount of foreign exchange assets in a certain foreign currency andthe amount of foreign
exchange liabilities in the respective currency.
The open foreign exchange position is long if the sum of foreign exchangeassets in a
certain foreign currency exceeds the sum of foreign exchange liabilitiesin the respective
foreign currency.
The open foreign exchange position is short if the sum of foreign exchangeliabilities in a
certain foreign currency exceeds the sum of foreign exchange assets in the respective foreign
currency.
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The foreign exchange position ratio represents the percentage ratio between the value of
the open foreign exchange position (recalculated in Moldovan lei) and the value of the total
regulatory capital of the bank.

8.What are the elements of foreign exchange?

The foreign exchange market is finally beginning to garner mainstream attention. The Bank
of International Settlements estimates that the average daily volume in the fx market is
around $4 trillion, which makes it by far the largest financial marketplace in the
world. Surprisingly, however, many novice investors and traders have never even heard of
this market.
Three key elements to forex trading: Leverage, Margin, and Equity.
Leverage
The idea of leverage in the fx market has been under intense debate over the last several
years. Since the market is decentralized and worldwide, regulation was largely absent from
the fx market until recently. In 2010, the National Futures Association instituted some major
changes, one of them being a cap on leverage at 50:1. This means that an fx trader in the
United States can trade on leverage at a ratio of 50:1. Note that leverage is a two-edged
sword. It will increase both losses and profits.
Margin
Margin is the life of a trader. If a trader does not have enough margin, then he cannot open a
trade. Furthermore, if a trader has an open position moving against him, he may eventually
not have enough money to act as margin, which means his account would suffer a margin
call.
Margin is the amount of money required to open a leveraged position. For example, if
Broker ABC offers 50:1 leverage, and Bob the Forex Trader wants to open a position of
$100,000, then Bob has to put up $2,000 of margin.

Equity
Everyone knows that one of the leading causes of business failure is a lack of initial capital,
and trading is no different. If a trader opens an account with a few thousand bucks and
trades heavily leveraged positions, his chances of success are nominal.
Equity is essential to trading success. The question many new traders have is, how much
money do I need to open an account? Well, the answer to that question is different for
everyone, and it largely depends on what your goals are. If you simply want to get some
trading experience, but still have a full-time job, then a person can open an account with a
few thousand bucks. However, if you are trying to generate enough capital gains to sustain
a living, then the initial account balance should be much, much higher.
Leverage, Margin, and Account Equity are three essential aspects of fx trading that every
trader must be familiar with.
9.sources of demand and supply of foreign exchange.

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Sources of Demand for Foreign Exchange :- The demand for foreign currency comes
from individuals and firms who have to make payments to foreigners in foreign currency.
The various sources are:- (i)Import Companies (ii) Foreign Investors
(iii) Speculators (iv) Lending to Foreigners.
Relation between Exchange Rate and Demand for Foreign Exchange: There is an
inverse relation between exchange rate and demand for foreign exchange. It states that
when exchange rate increases, demand for foreign exchange decreases and when
exchange rate decreases, demand for foreign exchange increases. There may be two
situations:-
1. When Exchange Rate Increases:- When exchange rate increases, the imports becomes
costlier and the importers curtail the demand for imports. Consequently, the demand for
foreign currency falls.
2. When Exchange Rate Decreases:- When exchange rate decreases, the imports
becomes cheaper and the importers increase the demand for imports. Consequently, the
demand for foreign currency increases.
Sources of Supply of Foreign Exchange:- The supply of foreign results from the receipt
of foreign currency. There are various sources:-
i) Exports Companies ii) Foreign Investors iii)Speculators iv)Borrowings from
Foreigners.
Relation between Supply of Foreign Exchange and Exchange Rate: There is a positive
relation between exchange rate and supply of foreign exchange. It states that when
exchange rate increases, supply of foreign exchange will also increases and when
exchange rate decreases, supply of foreign exchange will also decreases. There may be
two situations:-
i)When Exchange Rate Increases:- When exchange rate increases, the exports
earnings will also increase. Consequently, the supply of foreign currency increases.
ii)When Exchange Rate Decreases:- When exchange rate decreases, the exports
earnings will also decrease. Consequently, the supply of foreign currency decrease.

10.What are the possible risk if exchange position is oversold or overbought at end of
day?

Markets that are in a strong uptrend can remain overbought for long periods of time and
markets that are in a strong downtrend can remain oversold for long periods of time. This is
why these oscillators have limited value in trending markets. However, when the market is in
a downtrend and the oscillator moves up to overbought, there is a much better chance of a
reversal. On the flip side, when the market is in an uptrend and the oscillator moves down to
oversold, there is also a good chance of a reversal.

Here is an example using the daily chart of the AUD/USD. Also plotted on the chart is a
Slow Stochastics using values of 15,5,5. You can see that while the market is in an uptrend,
the Stochastics will spend more time in an overbought condition and little time in the
oversold condition. This is typical in a strong uptrending market. Also, when Stochastics
moves down to an oversold condition, the market has a tendency to reverse. This is one way
some traders use this tool to identify a buying opportunity. But the key here is that the
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market is in an uptrend. If the market was in a downtrend, the opposite would be true and
those same traders would treat a move up to overbought as a selling opportunity.

11.Why advance booking for foreign exchange is done?

12.Define Foreign Exchange Market And Discuss Tne Main Characteriscis Of Foreign
Exchange Marketjune/13
Foreign exchange market: Foreign Exchange Market is the market in which participants are
able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made
up of banks, commercial companies, central banks, investment management firms, hedge
funds, and retail forex brokers and investors. The forex market is considered to be the largest
financial market in the world.

Nature or Features of Foreign Exchange Market:-

1.Global Market:- Foreign exchange market is a global market. It means foreign
exchange buyer and seller world wide exist. It is the largest market in the world.
2.Over the Counter Market:- The market does not denote a particular place where
currencies are transacted. Rather it is an over the counter market. It consists of trading
desks at major agencies dealing in foreign exchange throughout the world, which are
connected by telephones, telex and so on.
3.Around the Clock Market:- Foreign exchange market is a round the clock market
meaning that the transactions can take place any time within 24 hours of the day. The
markets are situated throughout the different time zones of the globe in such a way that one
market is closing the other is beginning its operations.
4.Currencies Traded:- In the foreign exchange market one country's currencies can be
exchanged for the currencies of another country. In this market only currencies are traded.
5.1-2% transactions are for actual trade, rest for speculation:- In foreign exchange
market only 1-2% transaction are for actual trade and most of the transaction is related to
speculation.
6. System:- Foreign exchange market is a system. It is a system of private banks,
financial banks, foreign exchange dealers and central bank through which individual,
business and government trade foreign exchange.
7.No physical transfer of money:- In foreign exchange market, most markets have an
electronic system for transfer of funds, which save time and energy.
8.Exist in the network of information system:- It is more informal arrangement
among the banks and brokers operating in a financial centre purchasing and selling
currencies, connected to each other by Tele-communication like telex, telephone etc.
9. Banks are involved in 95% cases:- Most of the transactions in foreign exchange
market is done with the help of commercial banks.
10.Foreign exchange market facilitates trade and investment.
11.A party can never be a demander of one currency without being simultaneously a
supplier of another.

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13.Functions of Foreign Exchange Market:-
1.Transfer of Purchasing Power:- Transfer of purchasing power is necessary
international trade and capital transactions normally parties living in countries with
different national currencies. Each party usually wants to deal in its own currency, but
the trade or capital transactions can be invoiced in one single currency. The foreign
market provides the mechanism for carrying out these purchasing power transfers.
2.Provision of Credit:- Because the movement of goods between countries takes time,
inventory in transit must be financed.
3.Minimizing Foreign Exchange Risk:- Each may prefer to earn a normal business
profit without exposure to an unexpected change in anticipated profit because
exchange rates suddenly changes. The foreign exchange market provides "hedging"
facilities for transferring foreign exchange risk to someone else.
14.Who are the Participants in the Foreign Exchange Market?
Ans. Foreign Exchange Market:- The foreign exchange market is the market where the
currency of one country is exchanged for that of another country and where the rate of
exchange is determined.Major Participants of Foreign Exchange Market:- Foreign
exchange market is a world widemarket and is made up of:
1.Retail Clients :- Retail clients made up of:
Tourists:- Individuals are normally tourists who exchange their currencies.
They also migrants sending a part of their income to their family members living
in their home country.
Firms:- Firms that participate are generally importers or exporters. Exporters prefer to
get the payments in their own currency. Importers \need foreign exchange for making
payments for the import.
International Investors
Multinational Corporations
Any other who need foreign exchange.
2.Commercial Banks Or Local Banks:- When firms and individual approach the local
branch of a bank, the local branch, in turn, approaches the foreign exchange
department in its regional office or head office. The later deals in foreign exchange with
other banks on behalf of the customers. Thus, there are two tiers in the foreign exchange
market.
(i)One tier involves the transactions between the ultimate customers and the banks.
(ii) The other tier consists of transactions between tow banks. The purpose of inter- bank
transactions is not only to meet the foreign exchange demand of the ultimate customers,
but also to reap gains out of movement in foreign exchange rates. In some cases, inter-bank
dealings take place directly, without any help from intermediaries, but generally banks
operate through foreign exchange brokers.
3. Central Banks:- These banks have been charged with the responsibility of
maintaining external value of the currency of the country. Two functional aspects done
by Central Bank:
TWO FUNCTIONAL ASPECTS OF CENTRAL BANK

CONTROLON FLOATING/ FIXED

DEMAND/ SUPPLY EXCHANGE RATE
OF FOREIGN CURRENCY
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4.Speculators:- Speculators who buy or sell currencies when they expect movement in
the exchange rate in a particular direction. The movement of exchange rate in the
desired direction gives them profit.
5.Arbitrageurs: - Arbitrageurs who exchange currencies because of varying rates of
exchange in different markets. The varying rates are the source of their profit. They
buy a particular currency at a cheaper rate in one market and sell it at a higher rate in
the other. This process is known as currency arbitrage.
6.Hedgers:- Non-banking entities, such as traders, that use the foreign exchange
market for the purpose of hedging their foreign exchange exposure on account of
changes in the exchange rate. They are known as hedgers.

15.Describe the following procedure arise from foreign trade for settlement of
payment------1. Open a/c, 2. Consignment sale 3.advance payment 4.bill for collection ;
and 5. Documentary credit.
Open Account
Open account means that payment is left open to an agreed-upon future date. It is one of the
most common methods of payment in international trade and many large companies will
only buy on open account. Payment is usually made by wire transfer or check. This can be a
very risky method for the seller unless he has a long and favorable relationship with the
buyer or the buyer has excellent credit. Still, there are no guarantees and collecting
delinquent payments is difficult and costly in foreign countries especially considering that
this method utilizes few official and legally binding documents. Contracts, invoices, and
shipping documents will only be useful in securing payment from a recalcitrant buyer when
his country's legal system recognizes them and allows for reasonable (in terms of time and
expense) settlement of such disputes.
Consignment sale
Consignment sale is an arrangement in trade in which a seller or the consignor sends goods
to a buyer or consignee without getting payment for the goods then itself. The consignee or
the buyer pays the amount only when the goods are sold. It is actually a delivery of goods
not amounting to sale. The seller retains the ownership of the goods until the payment is
made in full by the buyer. The unsold goods will be taken back after some period. It is also
referred to as sale or return. The seller is usually responsible for loss, shrinkage, or damage
of its merchandise while in the control and custody of the buyer.
Cash-in-Advance (Pre/advance-Payment)
Under these terms of purchase, the importer must send payment to the supplier prior to
shipment of goods. The importer must trust that the supplier will ship the product on time
and that the goods will be as advertised. Basically, Cash-in- advance terms place all of the
risk with the importer/buyer. An Importer may find his seller requiring prepayment in the
following circumstances:
Down Payment-The Buyer pays the Seller a portion of the cost of the goods "in advance"
when the contract is signed or shortly thereafter. There are advantages and disadvantages of
down payment terms. The down payment method induces the Seller to begin performance
without the Buyer paying the full agreed price in advance. The disadvantage is that there is a
possibility the Seller may never deliver the goods even though it has the Buyer's down

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payment. This option must be combined with one of the other options to cover the full cost
of goods.

Advance against bills for Collection:

Banks generally accept export bills for collection of proceeds when they are not drawn under
a L/C or when the documents, even through drawn against an L/C contain some
discrepancies. Bills drawn under L/C, without any discrepancy in the documents, are
generally negotiated by the bank and the exporter gets the money from the bank
immediately. However, if the bill is not eligible for negotiation, he may obtain advance from
the banks against the security of export bills. Banks may give advance ranging from 50 to 80
percent of the documents value. In addition to the export bills, banks may ask for collateral
security like a guarantee by a third party and equitable/registered mortgage of property.
Letter of credit
A documentary creditalso called a letter of creditis a conditional guarantee of payment
in which an overseas bank takes responsibility for paying you after you ship your goods,
provided you present all the required documents (such as documents of title, insurance
policies, commercial invoices and regulatory documents).
A documentary credit is a separate contract from an export contract. The parties to a
documentary credit deal with documents, not the goods that the documents relate to.
Documentary credits are a common method of payment in the international trade of goods as
they offer some protection to both you and your buyer. International trade procedure in
which the credit worthiness of an importer is substituted by the guaranty of a bank for a
specific transaction. Under documentary credit arrangement (also called letter of
credit arrangement) a bank (usually in the importer's country) undertakes to pay for
a shipment, provided the exporter submits the required documents (such as a clean bill of
lading, certificate of insurance, certificate of origin) within a specified period.

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 Forward Exchange

16. what is meant by forward exchange?

Forward exchange is the transaction in which the exchange of currencies take place at a
certain specified future date. For example, a foreign exchange contract may specify that the
payment has to be settled after 3months, or it may be a 90-day maturity contract.

who are the main participant in a forward exchange deal?

The uses for a forward foreign exchange contract

Forward foreign exchange contracts are useful for companies that have entered into a
contract to either make or receive a foreign currency payment at a fixed point in the future.
In either case, it will eliminate the transaction exposure that is one of the three core
components of foreign exchange risk. It makes the rate certain, and typically allows the
company to know exactly what the proceeds will be or, in the case of a purchase, what the
cost will be. There is, however, a residual economic exposure.

The uses of a forward foreign exchange contract vary slightly depending on whether the
company is an importer or an exporter.

For the importer

An importer will have entered into a contract to import goods. The importer will need to pay
for these goods with foreign currency on a pre-determined date in the future. Entering into a
forward foreign exchange contract will allow the importer to know what the cost of these
goods are in domestic currency at the point of agreeing to purchase them. This will allow the
company to establish the cost of these goods with certainty.

For the exporter

An exporter will be expecting a foreign currency payment on a specific date in the future.
Entering into a forward foreign exchange contract will allow the exporter to know what the
value of this future flow is either prior to, or shortly after, the contract to export is signed.
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Crucially, it allows the exporter to ensure that, although the price is set in a different
currency, the company does know how much of its own currency it will receive and does not
make a loss on the transaction after the foreign exchange transaction.

In both cases, forward foreign exchange contracts allow the company to eliminate the
uncertainty associated with the future foreign exchange transaction. Such a transaction is
particularly useful for companies that cannot hedge this exposure naturally, or that have to
buy or sell at prices quoted in foreign currency. Some goods are traded in standard currencies
(for example, oil is traded in dollars). In other industries, a dominant customer may require
its suppliers to invoice in its operating currency and thus assume any consequent foreign
exchange risk.

Features of forward contract at a glance

A forward contract is a binding agreement to exchange a set amount of currency at a

given exchange rate on a specific date in the future
Available in USD, AUD, NZD, JPY, GBP, EURO and other currencies upon
application
Forward foreign exchange contracts are a valuable tool to manage foreign exchange
exposures for:
o importers and exporters trade
o investors and borrowers capital
The contract does not represent a forecast of where the exchange rate will be on the
date. Rather, it is the spot price adjusted for interest differentials between the two
currencies involved for the period between the spot and value dates
They provide a way to "lock-in" an exchange rate for the future
It will provide certainty for decision-making given a known value of the exchange rate
on the due contract value date
Eliminates uncertainty over where exchange rates will be at a future date
Allows importers to know "what you will pay" and set prices accordingly.

17. what are the advantages of forward exchange and why customer accept forward
exchange covering?

What are the advantages of forward foreign exchange contracts?

There are a number of advantages for the treasurer who uses forward foreign exchange
contracts to manage foreign exchange risk.

It eliminates uncertainty over the cost of both future foreign currency payments and
receipts.
It therefore allows the treasurer and business unit managers to budget for a particular
transaction that requires some inputs priced in other currencies.

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 It eliminates any need to continue to monitor the exchange rate between the time that
an agreement is made and payment is needed. Treasurers should not be acting as
currency speculators, gambling on picking the best rate.
They are flexible. They can be used early or extended, either by purchasing another
forward contract or by structuring a forward option. Forward options provide
flexibility in the settlement date, although the pricing does reflect this.

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.
why customer accept forward exchange covering?

customer accept forward exchange covering because Forward exchange contracts are used
to secure a rate today for settlement at some time in future, usually longer than two business
days. It also include three term those favour the customer. Three terms are discussed below-

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.

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.
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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 buy 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.

Forward exchange contracts- Cancellations or Surrenders

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.

18. what kind of risks can be covered by forward exchange

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:

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 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?
19. what kind of risks arises from forward exchange and how bank can mitigate its
own(bank) risk arises from forward exchange?

What are the disadvantages of forward foreign exchange contracts?

Just as with any other form of hedging, forward foreign exchange contracts are not perfect.
They will not eliminate all the risk associated with the foreign exchange transaction.

This type of transaction fixes the exchange rate. If the exchange rate moves in your
favour after you have fixed it, then you will not be able to take advantage of this
movement. If your competitors have not fixed the rate, then they may be able to
undercut your price. The longer the period for which you fix the rate, the greater is the
risk of this happening. Thus economic risk remains.
Forward foreign exchange contracts are usually used to meet a future foreign currency
requirement. These usually result from obligations under a trade contract with a
company operating in a different currency from yours. If this contract is not met and
the forward contract is not required, it could be costly reversing the transaction,
although this does depend on the currency movements in the intervening period.

Forward foreign exchange contracts can be useful tools to manage foreign exchange risk.
However, as with other instruments, it is important that the implications of the contract are
fully understood before any agreement is made.

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