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Forward Settlement and Sale of Foreign Exchange


 

Introduction

Forward settlement and sale of foreign exchange refers to the transaction that a customer reaches an agreement for forward settlement and sale of foreign exchange with the bank. Under the agreement, the currency type, amount, term and foreign exchange rate of foreign exchange settlement and sales in the future are agreed by two parties, and on the due day in the future, the transaction mentioned above should then be processed according to the specified terms.

Features

A forward settlement and sale of foreign exchange adopts the principle of actual demand, which is valued with several prices in one day. The product allows customers to lock the foreign exchange rate in the future, namely to lock the costs or benefits in the future which play the role of both value maintenance and risk prevention. In addition, such a forward settlement and sale of foreign exchange product can be combined with other ones. The Huilida transaction is a portfolio of RMB deposit + USD loan + a forward sale of foreign exchange. The background of this product is that a customer is in need of USD currently while the existing fund in the customer's account is RMB, and the customer wants to reduce the cost via the forward sale of foreign exchange in USD, of which the premium price is greatly deviated from the average price of interest rate.

Term

In Bank of China, customers can apply for a forward settlement and sale of foreign exchange with an optional term which is in 3 years(including a standard term or a non-standard term) as well as an option forward transaction. Standard terms of the forward transaction are divided into 7 days, 20 days, 1 month, 2 months, 3 months, 4 months, 5 months, 6 months, 7 months, 8 months, 9 months, 10 months, 11 months, 12 months and so on, while the non-standard ones can be selected at customer’s will. The term of an option forward transaction is determined in light of the starting day and maturity day of the transaction. The determination of the two dates above should be in line with the standard of above terms as well as identical to any one of them. The maximum term for an option forward transaction is 3 year.

Guarantee

While the transactions of forward settlement and sale of foreign exchange is handled, the customer is required to pay a margin or a part of the credit line is deducted.

Interest Rates

Market interest rates.

Target Customers

Domestic institutions and other customers approved by the State Administration of Foreign Exchange.

Application Qualifications

1. Under the regular items, according to Regulations Governing the Purchase and Sale of Foreign Exchange, all the settlement and sale of foreign exchange business may apply for the corresponding forward transactions. Upon the due delivery of a forward transaction for the settlement and sale of foreign exchange, the customer should provide all valid certificates required by such operations.

2. Forward transactions for the settlement and sale of foreign exchange under the capital items are limited to the following areas:

Repayment of Bank of China's own foreign exchange loans;

Repayment of overseas loan registered by the State Administration of Foreign Exchange;

Foreign exchange revenue and expenditure of FDI registered by the State Administration of Foreign Exchange;

Foreign exchange capital income of foreign invested enterprises registered by the State Administration of Foreign Exchange;

Foreign exchange revenue from overseas listed domestic entities registered by the State Administration of Foreign Exchange;

Other foreign exchange revenues and expenditures approved by the State Administration of Foreign Exchange.

Process

1. Customers applying for forward transactions of settlement and sale of foreign exchange should first open relevant accounts in Bank of China.

2. Signature of General Agreement on Forward Foreign Exchange Settlement and Sale. A customer applying for the forward settlement and sale of foreign exchange transactions needs to reach "General Agreement on Forward Foreign Exchange Settlement and Sale" with Bank of China. The agreement should be duplicated, with one copy for each party.

3. Authorized verification and approval. When applying for forward transaction of settlement and sale of foreign exchange, customers need to fill the Proxy for Forward Foreign Exchange Settlement and/or Sale as well as submit Bank of China with necessary valid certificates according to requirements of relevant regulations on foreign exchange settlement, sale and payment. Bank of China carries out the verification based on the Proxy and relevant certificates mentioned above before the approval of such transactions. The amount of the forward settlement or sale of foreign exchange should not exceed the expected amount of collection and payment, and its transaction period should also be in line with the actual transaction deadline.

4. Transaction conclusion. After Bank of China has recognized the validity of a customer's consignment, the customer pays a corresponding margin or a part of the credit line is deducted. Upon a transaction conclusion, the Authentication Letter for Forward Foreign Exchange Settlement and/or Sale Transactions is issued to the customer by Bank of China.

5. Verification and delivery on the maturity day. On the maturity day, Bank of China verifies the valid certificates and/or the commercial bill submitted by the customer according to relevant management regulations on foreign exchange settlement and sale, as well as the rules on foreign exchange collection and payment, before the delivery.

6. Extension. The customer who cannot carry out timely delivery for rational reasons may apply for extension.

7. Breach of contract. If a customer fails to fully perform the contract, Bank of China is entitled to conduct initiative liquidation on the default part after the final settlement day.

Case

In October 2004, a large textile export company came to Bank of China to make consultation on a business of forward value maintenance. The company was expected to reach a forward export contract of 8 million USD with a Japanese customer in November 2004.. Considering that the collected currency was non-local currency; the company wanted Bank of China to provide hedging instruments. Taking the company's actual situation into account, Bank of China recommended the company with the forward foreign exchange settlement transaction to avoid a potential foreign exchange loss arising from foreign exchange rate fluctuations in the process of the forward USD revenue collection during the signature of the export contract. Thus the exchange costs for the company are locked in advance.

On November 1, 2004, the Company and Bank of China conducted a transaction of forward foreign exchange settlement of 8 million USD with the term of 10 months, and at a foreign exchange rate of 8.1728. On September 2, 2005, upon the USD payment from its Japanese customer, the company immediately carried out the delivery procedures for transaction mentioned above. Spot price of RMB to USD foreign exchange settlement was 8.0787 on that day. Therefore, compared with such a spot transaction of foreign exchange settlement, this company increased revenue of RMB 752,800 via the forward foreign exchange settlement transactions mentioned above.

Our Advantages

In April 1997, Bank of China took the lead in launching the transactions of forward settlement and sale of foreign exchange. It has accumulated many experiences. In addition, with sufficient funds of foreign exchange, the spread of forward prices is small.

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