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Foreign Exchange Forward Deal


 

Introduction

Foreign Exchange Forward Deal refers to the foreign exchange transaction on a foreign exchange rate agreed by the buyer and seller under a foreign exchange contract, and for delivery on an agreed day, which is generally a certain day after the second working day after the transaction.

Features

1. A customer entrusts one bank with the purchasing of a certain currency and the selling of another currency at a contractual foreign exchange rate on a specified settlement day to achieve the conversion between various foreign currencies.

2. For a high interest currency, the forward price is lower than the spot price, while for a low-interest currency, it is higher. The customer may fully lock in exchange rate risk by finalizing, at the trading day, the exchange rate for the settlement date in the future.

Target Customers

1. It is applicable to meeting the customer's demand of transactions among foreign currencies some day in the future, to company's settlement of import and export trade, to the payment of L/C margin and so on.

2. Customers are required to have bank accounts in foreign currency.

Application Qualifications

The customer shall have deposited margin or have a line of credit in Bank of China.

Process

1. Signing the agreement: The applicant, before the foreign exchange forward transaction, shall sign with Bank of China the Master Agreement of Financial Derivative Transactions on the Chinese Inter-bank Market and the Supplemental Agreement of Financial Derivative Transactions on the Chinese Inter-bank Market (Corporate Customers Edition).

2. Implementation of margin: The credit line or corresponding margin is implemented via international settlement departments of Bank of China.

3. Inquiry: The applicant determines the details of a forward foreign exchange transaction via the consignment in written form and makes the corresponding inquiry to Bank of China.

4. Transaction conclusion: When a transaction is concluded, Bank of China will deliver a transaction authentication to the applicant in writing.

5. Settlement: The actual delivery is conducted on the delivery date. The applicant may, if necessary, request the Bank to close the deal unchanged  before maturity or conduct a rollover.

Case

An import and export company mainly exports to customers in Japan and Latin America and the currencies it receives are primarily the Yen and the Brazilian Real. In October 2011, strong price fluctuations of those currencies caused great risk to the company. In this situation, Bank of China suggested it hedging against inflation and locking in risk through foreign exchange forward deal. The specific operation was to sell 1.45 billion yen, an amount that was expected to be received three months later, at 76.50 – the current forward market price. After receipt of about US$ 18.9542 million, the company no longer needed to worry about market fluctuations in exchange rates.

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