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Forward Contracts 

Elimination of exchange risk due to movement in the exchange rat can be avoided by the following options:

• By invoicing in Indian Rupees.
• By fixing the Foreign Exchange Contract.

First alternative is possible only when the buyer agrees to it. He may have his own reasons for not agreeing to invoice in Indian rupees. The second alternative is commonly resorted to. This alternative involves booking of forward exchange contract with your bank.

This means that pending submission of documents to the bank for purchase/negotiation, you have made firm commitment with the bank under which you agree to sell to the bank foreign exchange at a future date/period and the bank agrees to purchase at the firm rate the foreign exchange to be tendered by you on that date / during the agreed period.

Thus you are in a position to know in advance the exchange rate you are going to get on submission of your export documents. Thus, though you have to pay some charge for booking a forward contract, you are certain about the rupee amount of the bill on conversion of foreign currency at a future date. For booking a forward contract, you should approach your bank with whom you are enjoying a credit limit.

The bank will book a forward contract only against a firm export order showing description and quantity of the goods to be supplied, aggregate price and approximate date of shipment. The bank can accept telex, cable order/fax in this regard, provided you give an undertaking to produce the original one. Where shipment has already been completed, forward contract will be booked on the basis of export bill tendered by you. It can also be booked against an irrevocable Letter of Credit provided L/C is complete in all respects and you give a declaration to the bank that you have not booked any forward contract against the underlying sale contract covering shipments under the L/C.You must ensure delivery of the related documents within the agreed period of the contract. In case you fail to deliver the documents within the specified period, the forward contract needs to be cancelled and fresh contract booked for which your bank will levy cancellation charges as per the FEDAI Rules.

In case the documents are delivered before the stipulated period, it will involve early delivery and bank will levy charges for the early delivery, as per FEDAI Rules. Where the documents are not delivered at all, contract has to be cancelled either at your request or by the bank itself under certain circumstances, and this will entail cancellation charges as per the FEDAI Rules.

It, therefore becomes extremely important that the period of delivery of the export documents is carefully chosen and strictly adhered to, so as to avoid unnecessary charges on account of early delivery or cancellation of forward contracts. However, facility for substitution of export order is permitted by RBI on specific request if the unfulfilled export order and the substituted order is for the same commodity.

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