Cancellation and Extension of Forward Exchange Contracts

The customer may approach the bank for cancellation when the underlying transactions becomes infructrious, or for any other reason he wishes not to execute the forward contract. If the underlying transaction is likely to take place on the day subsequent to the maturity of the forward contract already booked, he may seek extension in the due date of the contract. Such requests for cancellation or extension can be made by the customer on or before the maturity of the forward contract.

Cancellation on Due Date

When the forward purchase contract is cancelled on the due date, it is taken that the bank purchases at the rate originally agreed and sells the same back to the customer at the ready TT rate. The difference between these two rates is recovered from/paid to the customer. If the purchase rate under the original forward contract is higher than the ready TT selling rate, the difference is payable to the customer. If it is lower, the difference is recoverable from the customer. The amounts involved in purchase and sale of foreign currency are not passed through the customer‘s account, only the difference is recovered/paid by way of debit/credit to the customer‘s account. In the same way, when a forward sale contract is cancelled it is treated as if the bank sells at the rate originally agreed and buys back at the ready T.T. buying rate. The difference between these two rates is recovered from/paid to the customer.

Early Cancellation

If a forward purchase contract is required to be cancelled by the customer earlier than the due date it would be cancelled at the forward selling rate prevailing on the date of cancellation, the due date of this sale contract to synchronise with the due date of the original forward purchase contract. For example, assume that on 12th September a three months forward purchase contract is entered into with a customer for USD 10,000. The due date of the contract is 12th December. On 12th November, the customer comes to the bank and requires cancellation of the forward contract. The contract will be cancelled by the bank selling back to the customer USD 10,000 at its Forward TT selling rate for one month. The difference between the rate under the original forward purchase contract and forward TT selling rate applied on the date of cancellation is payable/receivable by the customer. If a forward sale contract is cancelled earlier than the due date, the cancellation would be done at the forward purchase rate prevailing on that date with due date to fall on the due date of the original forward sale contract.

Extension on Due Date

An exporter finds that he is not able to export on the due date but expects to do so in about two months. An importer is unable to pay on the due date but is confident of making payment a month later. In both these cases, they may approach their bank with which they have entered into forward contracts to postpone the due date of the contract. Such postponement of the date of delivery under a forward contract is known as the extension of forward contract. When a forward contract is sought to be extended. It shall be cancelled and rebooked for the new delivery period at the prevailing exchange rates. FEDAI has clarified that it would not be necessary to load exchange margins when both the cancellation and re-booking of forward contracts are undertaken simultaneously. However, it is observed that banks do include margin for cancellation and rebooking as in any other case.

Early Extension

When the request for extension is received earlier to the due date, it would be cancelled at the relevant forward rate (as in the case of cancellation) and rebooked at the current rate.

Overdue Forward Contracts

The customer has the right to utilise or cancel or extend the forward contract on or before its due date. No such right exists after the expiry of the contract. FEDAI Rule 8 provides that a forward contract which remains overdue without any instructions from the customer concerned on or before the due date, shall on the 15th day from the date of maturity be automatically cancelled by the bank. The customer remains liable for the exchange difference arising there from, but if it results in profit it need not be passed on to the customer. In case of delivery subsequent to automatic cancellation, the appropriate current rate prevailing on such delivery shall be applied.