Module: | MODULE A: INTERNATIONAL BANKING
Q22: Evaluate the following statements regarding the Foreign Exchange Dealers Association of India guidelines on the realization and automatic cancellation of unutilized forward contracts. Identify the incorrect statements.
Statement 1. If a corporate customer fails to utilize a booked forward contract on its specified due date, the Authorized Dealer is mandated to automatically cancel the contract on the third working day following the due date.
Statement 2. When the bank automatically cancels an unutilized forward purchase contract where the customer failed to deliver foreign currency, the bank will recover the foreign currency by selling it back to the market using the prevailing interbank Spot Selling Rate.
Statement 3. If the automatic cancellation of a forward contract results in a net exchange profit due to favorable market movements, the Authorized Dealer is legally required to pass this profit directly to the defaulting customer.
Statement 2. When the bank automatically cancels an unutilized forward purchase contract where the customer failed to deliver foreign currency, the bank will recover the foreign currency by selling it back to the market using the prevailing interbank Spot Selling Rate.
Statement 3. If the automatic cancellation of a forward contract results in a net exchange profit due to favorable market movements, the Authorized Dealer is legally required to pass this profit directly to the defaulting customer.
✅ Correct Answer: C
🎯 Quick Answer:
Statement III is the only incorrect statement, making Option C the right choice for this question.If a customer fails to honor them, the bank must reverse the position in the live market to balance its own books, generating either a cancellation gain or loss.
Structural Breakdown: Statement I is correct.
According to regulatory rules, banks cannot keep overdue forward contracts open indefinitely.
If the customer gives no instructions, the contract is automatically cancelled on the third working day after maturity.
Statement II is correct.
In a forward purchase contract, the bank agreed to buy foreign currency from the customer.
If the customer defaults, the bank has a shortage of foreign currency.
To balance its books, the bank must instantly buy that currency from the open market and sell it to itself.
It applies its Spot Telegraphic Transfer Selling Rate to calculate the cancellation cost.
Statement III is incorrect.
A strict penal rule applies here.
If the cancellation results in a financial loss to the bank, the loss is forcefully recovered from the defaulting customer.
However, if the cancellation results in an exchange profit, the profit is retained by the bank and is absolutely not passed on to the defaulting customer.
This acts as a deterrent against speculative defaults.