Extension of Forward Contract

Extension or Rollover of Forward Contract

Some times may be due to some unforeseen reasons, payment or receipt of foreign currency is required to be deferred. In such cases banks may be requested to extend the date of forward contract. Extension of contract will require cancellation of existing contract and fresh booking of new contract.

If such cancellation involves any gain then that will be transferred to customer and if cancellation involves any cost then that will be recovered from customer.

Rollover is just like Extension. Under Rollover part amount is settled on due date and part amount is extended for settlement to new date in future.

To know about cancellation of forward contract please click here.

Let’s understand the extension or rollover from the perspective of importer and exporter.

Extension – Importer Perspective

Suppose you are an importer and you have bought a machine from USA and your payment is due just after 3 months. You entered into a forward contract with bank to buy $ after 3 months. But on or before due date of forward contract, due to any unforeseen reason, you thought that you will not be able to make payment to your seller in USA. You have requested to your seller to get 1 additional month for making payment. Your seller provided you 1 more month. Then you are also required to request your bank for extension of forward contract for 1 more month.  

Bank has already entered on your behalf in Inter-Bank market for execution of forward contract after 3 months. Bank can not cancel his contract in IB market. Therefore, to nullify this buying position, Bank will sell the foreign currency on your behalf in IB market.

If cancellation of initial forward contract is done on due date the cancellation rate would be spot rate on the date of cancellation. But if you requested the bank for extension before the due date of initial contract then cancellation rate would be spot rate on the date of request plus or minus swap points of remaining period of contract.

After cancellation of current contract, Bank will book a fresh contract for extended period.

Example

Mr. Vineet imported goods from USA worth $ 10,000. Later, he entered into a forward contract with a bank to buy $10,000. Following are the details of the contract-

Contract Due Date – December 31^st 2019

Contract Rate – 1$ = ₹ 70.80

On 13^th November, 2019 Mr. Vineet requested the bank for extension of the forward contract up to 31^st January, 2020 and the following details are available-

IB Rates on 13^th November, 2019-

Spot 1$ = ₹ 71.05 – 72.50

Forward Swap Points-

November 2019: 1100/ 1200

December 2019: 2300/ 2400

January 2020  : 5500/ 5700

Exchange margin .09% on TT Buying and .14% on TT Selling

Find out amount payable to or receivable from customer due to extension of forward contract.

Ans: –

Here, Mr. Vineet entered into a forward contract to buy $10,000 from Bank. To fulfil this requirement bank will enter into IB Market to buy $ 10,000 on forward basis on Ask Rate (The rate at which market want to sell).

Request of Mr. Vineet for extension of contract placed on 13^th November, 2019.

Following actions will be taken by bank-

Step- I: Cancellation of current contract-

Now, in case of cancellation on 13^th November, 2019, Bank will create an opposite position to cancel the contract.

Position in Original Contract – Buy (on Ask Rate)

Position for cancellation – Sell (on Bid Rate) (Opposite of Original Position)

That means relevant rate for cancellation is Bid Rate i.e. 1$ = ₹ 71.05 

Calculation of Cancellation Rate (13^th November, 2019)

Calculation of amount payable/recoverable from customer

(a) Contracted Rate    1$ = ₹ 70.8000

(b) Cancellation Rate  1$ = ₹ 71.2158

Net amount payable to customer = (b – a) * $10,000 = ₹ 4,158

Step II: – Fresh Booking of New Contract for extended period

Calculation of rate for New Contract-

As the importer want to buy $ therefore relevant rate would be Ask Rate

It means Mr. Vineet will pay ₹ 7,31,723 (₹ 73.1723 * $10,000) to buy $ on 31^st January, 2020.

Extension – Exporter Perspective

Suppose you are an exporter and you have sold a machine to a customer in USA and you will get your payment just after 3 months. You entered into a forward contract with bank to sell $ after 3 months. But on or before due date of forward contract, due to any unforeseen reason, your customer is not able to make payment to you. Your customer has requested to you to provide 1 more month for payment. You have given your consent to your customer for delayed payment. Then you are also required to request your bank for extension of forward contract for 1 more month. 

Bank has already entered on your behalf in Inter-Bank market for execution of forward contract after 3 months. Bank can not cancel his contract in IB market. Therefore, to nullify this sell position, Bank will buy the foreign currency on your behalf in IB market.

If cancellation of initial forward contract is done on due date, the cancellation rate would be spot rate on the date of cancellation. But if you requested the bank for extension of forward contract before the due date of initial contract then cancellation rate would be spot rate on the date of request plus or minus swap points of remaining period of contract.

After cancellation of current contract, Bank will book a fresh contract for extended period.

Example

Mr. Vineet exported goods to USA worth $ 10,000. Later, he entered into a forward contract with a bank to sell $10,000. Following are the details of the contract-

Contract Due Date – December 31^st 2019

Contract Rate – 1$ = ₹ 70.80

On 13^th November, 2019 Mr. Vineet requested the bank for extension of forward contract up to 31^st January, 2020 and the following details are available-

IB Rates on 13^th November, 2019-

Spot 1$ = ₹ 71.05 – 72.50

Forward Swap Points-

November 2019: 1100/ 1200

December 2019: 2300/ 2400

January 2020  : 5500/ 5700

Exchange margin .09% on TT Buying and .14% on TT Selling

Find out amount payable to or receivable from customer due to extension of contract.

Ans: –

Here, Mr. Vineet entered into a forward contract to sell $10,000 to Bank. To fulfil this requirement bank will enter into IB Market to sell $ 10,000 on forward basis on Bid Rate (The rate at which market want to buy).

Request of Mr. Vineet for extension of forward contract placed on 13^th November, 2019.

Following actions will be taken by bank-

Step- I: Cancellation of current contract-

Now, in case of cancellation on 13^th November, 2019, Bank will create an opposite position to cancel the contract.

Position in Original Contract – Sell (on Bid Rate)

Position for cancellation – Buy (on Ask Rate) (Opposite of Original Position)

That means relevant rate for cancellation is Ask Rate i.e. 1$ = ₹ 72.50 

Calculation of Cancellation Rate (13^th November, 2019)

Calculation of amount payable/recoverable from customer

(a) Contracted Rate   1$ = ₹ 70.8000

(b) Cancellation Rate 1$ = ₹ 72.8418

Net amount recoverable from customer = (b – a) * $10,000 = ₹ 20,418

Step II: – Fresh Booking of New Contract for extended period

Calculation of rate for New Contract-

As the exporter want to sell $ therefore relevant rate would be Bid Rate

It means Mr. Vineet will receive ₹ 7,15,356 (₹ 71.5356 * $10,000) on selling of $ on 31^st January, 2020.

I hope you have understand the concept of extension of forward contract. If you have any query or suggestion regarding this topic then feel free to write in comment section. I will try my best to reply you as soon as possible.