Module: | MODULE A: INTERNATIONAL BANKING
Q234: Consider the following statements regarding the trading of Non-Deliverable Forwards by Banking Units operating within the offshore centre:
Statement 1: Banking Units are legally permitted to offer Rupee-linked Non-Deliverable Forward contracts to non-resident entities to help them hedge their domestic Indian Rupee currency exposures.
Statement 2: The final financial settlement of these Rupee-linked Non-Deliverable Forward contracts must take place exclusively in a freely convertible foreign currency rather than the physical delivery of Indian Rupees.
Statement 2: The final financial settlement of these Rupee-linked Non-Deliverable Forward contracts must take place exclusively in a freely convertible foreign currency rather than the physical delivery of Indian Rupees.
✅ Correct Answer: C
The offshore currency derivative market was developed to bring offshore currency trading back into the regulated domestic ecosystem.
Statement 1 is correct.
Historically, non-residents hedged their currency exposure in foreign jurisdictions like Singapore or London.
Now, Banking Units in the smart city are legally permitted to offer Rupee-linked Non-Deliverable Forwards directly to non-resident clients, capturing that lost market share.
Statement 2 is also correct.
The defining characteristic of a Non-Deliverable Forward is that there is absolutely no physical exchange of the underlying domestic currency at maturity.
Instead, the net difference between the contracted forward rate and the prevailing spot rate is calculated and financially settled exclusively in a freely convertible foreign currency, typically the United States Dollar.
Statement 1 is correct.
Historically, non-residents hedged their currency exposure in foreign jurisdictions like Singapore or London.
Now, Banking Units in the smart city are legally permitted to offer Rupee-linked Non-Deliverable Forwards directly to non-resident clients, capturing that lost market share.
Statement 2 is also correct.
The defining characteristic of a Non-Deliverable Forward is that there is absolutely no physical exchange of the underlying domestic currency at maturity.
Instead, the net difference between the contracted forward rate and the prevailing spot rate is calculated and financially settled exclusively in a freely convertible foreign currency, typically the United States Dollar.