However, there are certain conventions. If we are trading on say, 27th of Feb ( in a leap year), for which the Spot date is 29th of February; the 1 month forward will not be 29th of March, but 31st of March. Similarly, if we are trading on 29th of January, the spot date being Jan 31st, the 1 month forward will not be 2nd of March, but 29th of February. The Indian market is a little different.

Here, forward rates are quoted for the end of the calendar month that is last business day of the month, 31st Dec, 31st Jan, 29 Feb etc. If the forward rate is asked/quoted for a non-regular date, it is called 'broken dates' or 'odd dates'. Value dates earlier than 1 month forward are called Short Dates. Other terminologies like Spot-Next (one day after the Spot date), Spot-week (One week forward) are also used by the market.

The Indian Connection
In the Indian context, forwards assume more significance as it is also used by the Central Bank as a tool to temper the strength/weakness of the local currency. If the Central Bank has intervened in the market by buying US Dollars against the Indian Rupee (value Spot) to arrest the appreciation of the latter, it may so happen that on the Spot date, the Rupees released by the Central Bank to the market may have other monetary implications.

Therfore, it sterilizes the effect by selling the US dollars (value Spot), and taking back the Rupees, simultaneously buying the Dollars value a Forward Date. It serves quite a few purposes: a) it stops the local currency from strengthening, b) it does not give additional liquidity to the market on the spot date, and c) it raises the forward premium (as more forwards dealt will affect the premium market as a function of more demand and less supply, as suggested earlier), thereby assuaging the feelings of the exporters who would have otherwise been affected by the Rupee appreciation.

All in all, Foreign Exchange Forwards are a relatively safe tool to hedge one's exposure. It is less complicated, easily understood, and more liquid. It gives the satisfaction that one has been able to crystallize one's liabilities at a rate which is determined now for a future date. However, over a period of time continued research in financial engineering has thrown up various other products. We will discuss the implications of the Foreign Exchange Forwards on the more complicated forms of such products, known as Derivatives in the coming issues.

Amrit K. Basu is the Head Treasury Products of proFX consulting & allied services, a Treasury Risk Management consultancy outfit. Amrit is also engaged in offering advisory to software companies as well as in placements in the treasury domain. He can be reached at amritbasu@profxconsulting.in.

This story appeared in COMMODITY MARKET, India’s No 1 news magazine on commodities

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