CS Professional Financial Treasury and Forex management Rollover of Forward Contract
Rollover of Forward Contract
In India, Foreign Exchange Dealers Association of India (FEDAI) rules do not allow a forward contract to be booked for more than 1 year. In case, a person has a foreign exchange exposure for more than 1 year, then he may enter into rollover of forward contract agreement.
Under Rollover of Forward Contract arrangement, the bank covers the entire foreign exchange exposure even for more than 1 year. However, since the foreign currency exposure cannot be entirely settled at the end of 1 year, hence the unsettled foreign currency exposure will be rolled over for a maximum period of next 1 year.
The rollover of forward contract usually applies the following steps:
Step 1: Cover the entire exposure of 1 year plus more than 1 year by entering into 1-year forward contract.
Step 2: At the end of 1 year take/make delivery of foreign currency required/available at the end of 1 year. Cancel the remaining exposure (which is for more than 1 year) at spot relevant exchange contract.
Step 3: Rebook/Enter into another Forward contract for a maximum period of 1 year.
Step 4: Rollover of Forward Contract should be undertaken if the person having foreign exchange risk exposure for more than 1 year expects that he will gain on cancellation of forward contract for foreign currency which is to be rolled over.
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