CS Professional Financial Treasury and Forex management Rollover of Forward Contract

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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