EXCHANGE RATE FLUCTUATION RISKS

An exporter can seek protection against risk associated with the fluctuations in the rate of exchange in two different ways namely

Exchange fluctuations risk cover from the ECGC Forward exchange cover from the commercial bank

EXCHANGE FLUCTUATION RISK COVER

This type of risk cover is available for payments scheduled over a period of 12 months or more upto a maximum period of 15 years. ECGC protects exporters of capital goods, civil engineering contractors and consultants who often receive payments over a period of years.

This cover can be obtained from the date of bidding right upto final installment

FORWARD EXCHANGE COVER

An exporter may incur huge losses or earn profits depending upon fluctuation in the rate of exchange of INR with foreign currency say US Dollar It is a contract between the two parties a bank and a customer requiring delivery at a fixed future date of a specified amount of one currency against another at the rate of exchange agreed to between the parties at the time of entering into the contract.

Spot Rate If it goes down

1 US $ = Rs 50 1 US $ = Rs 45 Rupee value strengthened 1 US $ = Rs 55 Rupee value weakened

If it goes up

For Exporter, when rupee value strengthened suffer loss from export proceeds For Exporter, when rupee value weakened gains profit from export proceeds

For Importer, when rupee value strengthened gain profit for making payments For Importer, when rupee value weakened suffer loss for making payments

Loss can be covered through forward exchange market by an agreement

Exporter can enter into agreement with bank to sell certain amount of foreign exchange at future date at fixed price if it is anticipated that INR would strengthen in future

Exporter can enter into agreement with bank to buy certain amount of foreign exchange at future date at fixed price if it is anticipated that INR would weakens in future

Forward quotations i.e, future rates of exchange for sale or purchase are expressed in two ways,
Outright rate - quoted to the merchant Premium or discount on spot rate - used by dealers in foreign exhange market.

Forward differential is known as swap rate. If the forward value of the currency is cheaper than spot rate, the currency is said discount in forwards. If the forward value of the currency is more than spot rate, the currency is said premium in forwards.

FEATURES OF FORWARD EXCHANGE COVER

Cover can be taken only in respect of contracts in foreign currencies and not in Indian rupees Forward cover is akin to forward purchase / sale of any commodity. Cover insulate(protect) against fluctuations in rates both adverse and favorable as the purchase and sale of foreign exchange

RULES AND REGULATION

Forward cover is available to importers/exporters form authorised dealers in foreign exchange i.e, commercial banks authorised by Reserve bank to deal in foreign currencies Rules are framed by FEDAI Forward cover can be taken only in respect of genuine trade transaction FC will be taken only in currencies where payments are authorised under exchange control regulation Banks verify necessary documents in support of the transactions and stamp them

FC booked for any time period or for any amount as desired by the customer of bank On deferred payment basis, bank book for FC for the aggregate amount of the expected proceeds Extension period of FC is at the option of the bank