Question on early delivery

CA Sahil Singla.. (Service Tax ) (3746 Points)

17 August 2011

Que.- On 15 July, 2007, SBI booked a forward purchase contact for Euro 50,000 due August 30 @ Rs. 56.35. On 10^th Aug. the customer requests the bank to extend the forward contact for 30^th Sept. Foreign Exchange rates on 10^th August are:

Spot 56.1325 – 56.1675

Forward 30^th Aug. 55.6625 – 55.7175

Forward 30^th Sept. 55.4425 – 55.5375

At what rate the contract will be extended? What amount of loss / gain will be receivable from / payable to customer?

Answer: On 10^th August, the bank will enter into two forward contacts with the customer.

(i) under first contract (maturity 30^th August, 2007), bank will sell Euro 50,000 to the customer on 30^th August @ 55.7175 (this contract is necessary for cancellation of 15^th July contract )

(ii) under second contract, bank will purchase Euro 50,000 from the customer on 30^thSept. @ 55.4425 (this contract is necessary as the customer wants Euro 50,000 on this date on forward basis )

On 30^th August:

(i) The Bank will purchase Euro 50,000 from customer ( under 15^th July contract) for 50,000 x 56.35 i.e. Rs.28,17,500

(ii) The Bank will sell Euro 50,000 to customer for 50,000 x i.e. 55.7175 i.e. Rs. 27,85,875 ( under the first contract entered on 10^th August).

(iii) Profit to customer is Rs.31,625. This profit will be paid to customer on 10^th August itself.

Doubt- In this case bank is suffering a loss- (56.35 - 55.7175)* 50000= Rs 31,625 mentioned as profit for customer in solution above. But we know that bank will not bear any loss on itself so it will recover this loss from the customer.( As it is a cancellation of contact before maturity.)

Plz correct me.