Booking of Forward Contract
The stages involved of booking and utilization of a forward contract may be summarized as follows.
The transaction of booking of forward contract is initiated with the customer inquiring of his bank the rate at which the required forward currency is available. In fact forward contract is a financial derivative. Before quoting a rate the bank should get details about
1. the currency
2. the period of forward cover, including the particulars of option and
3. the nature and tenor of the instrument.
For instance, when the customer says simply dollar, the bank should ascertain whether it is US dollar or Canadian dollar or Australian dollar. Similarly, if it is a bill transaction, it should be ascertained whether it is sight or 30days bill etc. Sometimes usance bills, is calculated from sight or from bill of lading.
If the rate quoted by the customer, he is required to submit an application to the bank along with documentary evidence to support the application, such as sale contract. While preparing the forward contract, following points are to be noted.
Contract must be state the first and last dates of delivery, it is not permissible to state in contract ‘delivery one week’ or ‘delivery one month’ or delivery ‘three months forward’, etc.
When more than one rate for bills with deferent deliveries are mentioned, the contract must state the amount against each rate.
No usance option may be stated in any contract for the purchase of bills. That is the contract should not give option to the customer to tender sight bill or in the alternative 30 days bill etc. it can be either sight bill or a usance bill of a specified usance as mentioned in the contract.
