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Importers/Exporters to mitigate exchange risks on under Document Credits (DC) and Import/Export Contract (Cont)
for sale/purchase of foreign currencies with the Bank at any time from the opening/registration of the DC/Cont subject that the period of the FEC should not exceed the validity of the DC/Cont
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REGULATIONS
FE cir 10/26.05.99):To prevent speculation by importers
and exporters, Banks are instructed that in case of closing out of FEC with customers where underlying DC/Cont has been cancelled or has expired un-utilized, the spot rate for counter transaction would be lower/higher of those prevailing on the date of booking of the FEC and the date of close out.
prohibited,FEC for one month will be for fixed maturity, in case payment is effected within one month this will be done applying Spot selling rate prevailing rate on the date of payment and the FEC will be closed out at the maturity date.
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2) 3) 4)
5) 6)
US$ 1 million on Day 90. Wants to book forward rate. Prevailing Rate on Day 1 is 60. MBL buys US$ 1million spot @ 60 MBL enters into a spot sale: forward buy swap with another bank XYZ XYZ Bank charges a Rs 1 premium MBL adds its fee of Rs 0.10 and quotes a forward rate of 60+1+0.1 = 61.1. MBL enters into a forward sale contract with the client. 4
Day 1 Importer comes to MBL. He has to pay US$ 1M on Day 90 to his overseas supplier. Wants to book forward rate. 1) Prevailing Rate on Day 1 is 60. 2) MBL enters into an agreement to purchase w/ another bank XYZ US$ 1M on Day 90 say @ 61 3) MBL adds its fee of Rs 0.10 and quotes a forward rate of 60+1+0.1 = 61.1 Rs/US$. MBL enters into an agreement with the client to sell $1 million on Day 90. 4) On Day 90, importer pays Rs 61.1M to MBL. 5) MBL keeps Rs 100,000 as its fee and pays Rs 61M to XYZ bank to receive US$ 1M. 8 6) MBL pays $1M to (or on behalf of) the importer
Scenario 2: Incomplete Transaction Closing Out between the Booking and Forward Delivery Date
Prior to or on the delivery date, importer indicates his inability to take the delivery and wishes to close out the contract (eg. Day 40). On Day 40 MBL will do the following:
1)
Enter into a forward sale agreement (say @ Rs59/US$) with ABC bank to sell US$1M on Day 90 (to square its position with XYZ on Day 90).Client will be charged upfront, the difference in this forward rate and the Initial forward Rate for Day 90 (i.e. 61.159=Rs 2.1/US$)
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Scenario 2: Incomplete Transaction Closing Out between the Booking and Forward Delivery Date
CONTD.
2)
Therefore in the above case if the spot rate on Day 40 is Rs 58/US$, according to this circular the client should have been charged (i.e. 61.1-58=Rs 3.1/US$). To keep in line with SBPs requirement which is to prevent speculation, MBL will charge the same difference, however, the difference in Spot Rate for Day 40 and Forward sale rate for day 90 (i.e. Rs 59-Rs58 = Rs 1/US$ in this case) will be given to charity and will not be included in the gain/other income for bank
3)
In addition, client will also be charged commission to execute this additional transaction.
On Day 90 MBL will receive US$1M from XYZ and will sell the same to ABC.
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4)
1) Buy US$1M from the market at spot rate (say @ Rs64/US$) 2) Settle the contract with the importer by selling US$1M for Rs 61.1 M as per the initial contract. 3) Enter into forward sale agreement with ABC bank (say @ Rs63/US$) 4) Charge the Importer upfront the difference (i.e. Rs 1/US$) 5) In addition, client will also be charged commission to execute this additional transaction. 6) On Day 90 MBL will receive US$1M from XYZ and will sell the same to ABC.
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RELATED ISSUES
The need to identify scheduled banks to advise them
about our new format for the forward contract (our contract is not a sale/purchase contract rather an agreement to sell or purchase) If the proposed Shariah alternative scheme is followed, it appears that MBL may not comply with SBPs circular (FE cir 10/26.05.99). Do we need to get SBP approval?
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2. 3. 4.
5.
Day 1 exporter comes to MBL. He will receive US$ 1 million on Day 90. Wants to book forward rate. Prevailing Rate on Day 1 is 60. MBL enters into an agreement to sell w/ another bank XYZ US$ 1million on Day90 say @ 59 MBL subtract its fee of Rs 0.10 and quotes a forward rate of 60-1-0.1 = 58.9. MBL enters into an agreement to buy $1 million on Day 90. On Day 90, client receives 58,900,000/- to MBL.
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7.
MBL keeps 100,000 as its fee and receives Rs 59,000,000 from XYZ bank in consideration of US$ 1 million. MBL pays Rs 58,900,000 to the exporter and gets US$ 1 million on Day 90
(7A) Prior to or on the delivery date, client indicates his inability to take the delivery and wishes to close out the contract. 8. MBL can only close out the contract on Day 90.
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Exporter Forward Contract of purchase foreign currency CONTD. 9. Prevailing Rate on Day 90 is 64.
10. MBL charges 100,000 from client as its fee. MBL sells US$ 1 million to XYZ bank and receives 59,000,000. It buys $ on spot at 64 and loss 64,000,000-59,000,000 = 5,000,000 is charged to the client. .
11. Prevailing Rate on Day 90 is 58.
12. MBL charges the client 100,000 as its fee. It buys $ on spot at 58 and gains 59,000,00058,000,000 = 1,000,000. This gain is forwarded to SBP.
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SBP APPROVAL
The transformation commission of State Bank of Pakistan (with some other Shariah scholars) approved the following foreign currency forward cover transaction. We could do the same procedure for our Araboon/Hamish Jiddiyyah transaction of shares.
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CONCLUSIONS
Forward share transaction, should be through an
agreement/undertaking to sell or purchase at a future date and it should not be a sale and purchase agreements.
the bank to the other party (seller) in advance by way of earnest money (Araboon/HamishJiddiyyah)against the shares to be purchased at a future date.
the(seller) can recover the differential to compensate the loss suffered by him due to depreciation of the price and adjust the earnest money there against.
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The amount of foreign currency is needed for genuine trade or payment transactions. The need will have to be supported by appropriate documents so as to prevent forward cover for speculative purposes. The forward cover shall be through an agreement to sell or purchase and it shall not be a sale and purchase agreement. It means that sale/purchase shall take place simultaneously at the agreed time in future at the rate agreed upon initially at the time of agreement to sell or purchase.
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ii)
While it will be permissible to fix the price of foreign currency in terms of Rupees according to the agreement, no forward cover fee shall be recovered. However, (i) an amount may be demanded by the bank from its client in advance by way of earnest money against foreign currency agreed to be sold at a future date or (ii) the fee could be built into the sale/purchase rate.
the bank can recover the differential and adjust the earnest money there against.
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