What is a Derivative?
A derivative is a financial contract, the price of which is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Many derivatives are characterised by high leverage.
Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are generally used as an instrument to hedge exchange rate and interest rate risk, but can also be used for speculative purposes.
What are Forward Exchange Contracts?
A forward contract is a binding obligation to buy or sell a certain amount of foreign currency at a pre-agreed rate of exchange, on or before a certain date.
Contract prices depend on the spot price of the currency pair, the forward premium or discount, amount, the expiry date and whether the customer requires an option period or a fixed date contract. A forward contract is the most common method of hedging against foreign exchange risk as it provides a guaranteed rate for exporters and importers. A forward contract is an obligation that must be honoured, even if the customer's trade requirement changes over the life of the forward contract. A forward contract therefore prevents the customer from benefiting from any favourable movements in exchange rates between booking the contract and completing the underlying transaction. No charges are levied for the provision of forward exchange cover to our trade finance customers.
Foreign Exchange Transactions:
Common Customer transactions are inward and outward remittances, transfers between accounts, issuing of foreign currency and travellers cheques for travel, settlement of external trade transactions, etc.
Transactions are permitted in the currencies approved by the Central Bank.
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