Simply outstanding presentation ! I had two follow up questions Sir : 1) In the given example we see the exporter is booking the contract for 3 months (1$= Rs 75.) at more than the spot rate (1$= Rs 74) , and if the 3 months forward rate is say 1$=Rs73 then will the Bank get any importer will be willing to book a contract at 1$=Rs 75 for 3 months given that he is going to get better rates in the spot market. Will the Bank allow such an agreement in the above scenario. 2) Is the limit assessment of Forward cover simply on the quantum of the post shipment finance limit sanctioned ?
Thank you. Your question 1 is not clear especially after what you have written after 1$=73. You can write it simple hindi or Hinglish as well. For question no. 2, forward cover limit assessment is based on expected dollars incoming or outgoing for a given period of time. Like if export sales for a year is 500 and cycle is 180 days then client will require forward cover of 250 in order to cover the risk. Further, even if you don't have export or import, you can still avail forward cover from branches. This is done by people doing speculation business of foreign currency and at maturity period contract is settled by differential amount only without any actual delivery of dollars
@@AnkushJain Thanks for your reply . Sir in the first question I meant that if the 3 months forward rate at the time of booking the contract is 1$=Rs 73 then probably the Bank won't grant the 3 months forward cover facility to exporter at 1$= Rs 75 as Bank will not get any importer who will be willing to book a forward contract at 1$=Rs 75 after 3 months when they are likely to get 1$= Rs 73 in the spot market after 3 months. I mean to say that prevailing 3 month forward rates also have a role to play in deciding whether or not to take forward cover. Besides if the exporter has import business too, some portion of the foreign currency exposure is likely to get naturally hedged.
Sir, I have 2 3 questions to ask: 1. On due date/ Agreement date , if exporter wants to execute agreement as per terms then bank will pay back or release initial margin money taken from customer in full or outstanding amount? As this is only calculation of notional profit and loss from bank side to mitigate probability of default. 2. During period of contract, one day price goes down against agreed price so does margin Money but what if price goes up over and above agreed price very next day, will there be any change in outstanding margin money or no change since no loss, only profit? 3. In hypothetical situation where exporter is into profit ever since he has entered into contract with bank , margin money is also as it is ,but as per his wish he wants to sell his dollars in spot market and not go ahead with contact, so his loss will be upto cancellation charges and other charges . So in practice does bank impose any lock in period in contract.? 2. In this situation, how bank will save it from loss , if it has another contact where it has to sells dollors on same due date and spot proice remains higher than agreed date on due date ?
On such cancellation, bank never goes for loss and margin deposited by exporter also gets adjusted to the extent of bank loss... Not much benefit occurs to exporter since he bears the loss of the bank which would be equivalent to profit gained in spot market
First of all Thank you very much sir, really I am grateful and your lecture is very helpful for me, as I am new in banking sector. Sir I have one confusion regarding forward cover, amount mentioned in vanila forward cover is 50, Notional 500, PFE -35 and MTM is 21 so how it comes.. ? And in this case whether 50 is initial margin..? Then what is notional 500 denotes..?
Bank asks customer to deposit the margin whenever their is MTM loss occurs. If customer does not pay then contract is cancelled and customer is asked to pay penalty. If customer does not pay penalty then he is termed as defaulter and recovery proceedings are initiated
@@AnkushJain The second benefit is also available on spot buying & selling of curency. Whereas in forward contact....there is a risk for Bank if the value of Rupee appreciates in respect to the hedged currency. Therefore the more the risk the more should have been the premium charged by Bank from customer. But the fees structure is not based on risk. Also Hedging seems to be a speculative activity for bank....why RBI allows dealing in such risk & speculative instruments ?
Please understand that if a bank enters into a contract with you to supply 100 dollars @rs. 80 after 3 months then bank also simultaneously enters a cross buy contract for itself say @79 after 3 months. Therefore gain is there for the bank. The only risk is, in case of adverse movements, the party can refuse to fulfill its commitments on due dates and therefore for that mark to margin concept is introduced which i explained in the video.
If bank has booked forward rate agreement with exporter for 3 months rate @75 rs per dollar as per example shown in video and spot rate at maturity is 73 rs per dollar there is benefit from exporter point of view but we as a bank loss of 2 rs is there how would bank do in such case also we are not deducting that amount from initial margin of exporter with us ???
Since the exporter is not at loss, bank will not deduct margin. Bank may or may not be at loss as it depends upon how bank has hedged its own risk at backend.
@@AnkushJain sir how assessment of derivatives is done ?? I mean the way we assess Lc bg how to derive eligible max permissible derivative limit to borower
@@AnkushJain sir kya aisa ho sakta j kisi case mein mtm to ho but initial margin na ho... In most of SL that i haver seen there is limit, notional amount, mtm yes or no. Purpose and docs to be executed..zydatar mein initial cash margin mene facility table mein nahi dekhay
Very Well Explained... I don't thing even ZCM in the bank having this much of knowledge. Appreciated.🔥🔥
Thank you 😊
Thanks for sharing the practical aspects of the forward cover. You really delivered it perfectly
Thank you 👍
Awesome explanation 👏 👌
Thank you
Nice video sir, ur videos is really very helpful for beginners, I m Despiratly waiting for your video on every Sunday🙏🙏
Thank you suresh.
good one
Thank you
Sir cannot thank you enough..
🙏🙏
Excellent
Thank you
Simply outstanding presentation ! I had two follow up questions Sir : 1) In the given example we see the exporter is booking the contract for 3 months (1$= Rs 75.) at more than the spot rate (1$= Rs 74) , and if the 3 months forward rate is say 1$=Rs73 then will the Bank get any importer will be willing to book a contract at 1$=Rs 75 for 3 months given that he is going to get better rates in the spot market. Will the Bank allow such an agreement in the above scenario.
2) Is the limit assessment of Forward cover simply on the quantum of the post shipment finance limit sanctioned ?
Thank you.
Your question 1 is not clear especially after what you have written after 1$=73. You can write it simple hindi or Hinglish as well.
For question no. 2, forward cover limit assessment is based on expected dollars incoming or outgoing for a given period of time. Like if export sales for a year is 500 and cycle is 180 days then client will require forward cover of 250 in order to cover the risk.
Further, even if you don't have export or import, you can still avail forward cover from branches. This is done by people doing speculation business of foreign currency and at maturity period contract is settled by differential amount only without any actual delivery of dollars
@@AnkushJain Thanks for your reply . Sir in the first question I meant that if the 3 months forward rate at the time of booking the contract is 1$=Rs 73 then probably the Bank won't grant the 3 months forward cover facility to exporter at 1$= Rs 75 as Bank will not get any importer who will be willing to book a forward contract at 1$=Rs 75 after 3 months when they are likely to get 1$= Rs 73 in the spot market after 3 months. I mean to say that prevailing 3 month forward rates also have a role to play in deciding whether or not to take forward cover. Besides if the exporter has import business too, some portion of the foreign currency exposure is likely to get naturally hedged.
Pl understand that forward rates are always on increasing side. They are not projected to be decreased in coming period.
Sir, I have 2 3 questions to ask:
1. On due date/ Agreement date , if exporter wants to execute agreement as per terms then bank will pay back or release initial margin money taken from customer in full or outstanding amount? As this is only calculation of notional profit and loss from bank side to mitigate probability of default.
2. During period of contract, one day price goes down against agreed price so does margin Money but what if price goes up over and above agreed price very next day, will there be any change in outstanding margin money or no change since no loss, only profit?
3. In hypothetical situation where exporter is into profit ever since he has entered into contract with bank , margin money is also as it is ,but as per his wish he wants to sell his dollars in spot market and not go ahead with contact, so his loss will be upto cancellation charges and other charges . So in practice does bank impose any lock in period in contract.?
2. In this situation, how bank will save it from loss , if it has another contact where it has to sells dollors on same due date and spot proice remains higher than agreed date on due date ?
For 1st question, Yes if there is loss then margin is adjusted from it but if the contract is favorable then it is paid back
2. No impact since it is profit
3. Loss of cancellation charges.. there is no lock in period that I am aware of
Bank will charge charges to the extent of loss incurred by the bank due to this
On such cancellation, bank never goes for loss and margin deposited by exporter also gets adjusted to the extent of bank loss... Not much benefit occurs to exporter since he bears the loss of the bank which would be equivalent to profit gained in spot market
First of all Thank you very much sir, really I am grateful and your lecture is very helpful for me, as I am new in banking sector.
Sir I have one confusion regarding forward cover, amount mentioned in vanila forward cover is 50, Notional 500, PFE -35 and MTM is 21 so how it comes.. ? And in this case whether 50 is initial margin..? Then what is notional 500 denotes..?
Thank you. Notional amount of 500 represents the total value of contracts that can be booked
Does banks return both initial margins and maintenance margins if there is no default from the parties?
If no booking to done and all contracts are squared off then margi n is returned
Can you please tell me what is credit conversion factor?
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Thanks
Thank you 😊
Can we take new property as margin in forward contact
Yes property backed forward cover also done
Maximum period for which we allow to book forward is it for 3 month or we allow to bool more
You can book for even 3 years.
Will these VAR/LER limits be considered Non Fund based limits?
No they are separate lines altogether. Although technically non fund Based but no such classification done
@@AnkushJain
Sir
How do we obligate VAR/LER/TREASURY LIMIT to calculate DSCR
They are not considered for dscr
Is DSCR calculated in OD facility..
Yes it it
Sir, if no cash margin is stipulated by bank in sanction order then how the bank is managing it's loss if incurred?
Bank asks customer to deposit the margin whenever their is MTM loss occurs. If customer does not pay then contract is cancelled and customer is asked to pay penalty. If customer does not pay penalty then he is termed as defaulter and recovery proceedings are initiated
@@AnkushJainSir in the above case, if bank has not taken cash margin then they must define MTM in SL right?
What is the profit of the bank in forward contact ?
Booking charges/fee
Difference in currency amount since banks sells at higher rate and buys at lower rate
@@AnkushJain The second benefit is also available on spot buying & selling of curency.
Whereas in forward contact....there is a risk for Bank if the value of Rupee appreciates in respect to the hedged currency.
Therefore the more the risk the more should have been the premium charged by Bank from customer. But the fees structure is not based on risk.
Also Hedging seems to be a speculative activity for bank....why RBI allows dealing in such risk & speculative instruments ?
Please understand that if a bank enters into a contract with you to supply 100 dollars @rs. 80 after 3 months then bank also simultaneously enters a cross buy contract for itself say @79 after 3 months. Therefore gain is there for the bank. The only risk is, in case of adverse movements, the party can refuse to fulfill its commitments on due dates and therefore for that mark to margin concept is introduced which i explained in the video.
@@AnkushJain
Thanks...but a counter innocent question.
With whom bank enters into a cross contact?? RBI Or Forex Market ??
@@MDVaashir forex markets, rbi, other importer/exporters as well
If bank has booked forward rate agreement with exporter for 3 months rate @75 rs per dollar as per example shown in video and spot rate at maturity is 73 rs per dollar there is benefit from exporter point of view but we as a bank loss of 2 rs is there how would bank do in such case also we are not deducting that amount from initial margin of exporter with us ???
Since the exporter is not at loss, bank will not deduct margin. Bank may or may not be at loss as it depends upon how bank has hedged its own risk at backend.
@@AnkushJain sir how assessment of derivatives is done ?? I mean the way we assess Lc bg how to derive eligible max permissible derivative limit to borower
Yeah i will make a video on it. But now the premium videos on such topics are based on monthly subscription introduced by me.
@@AnkushJain sir can you share details of monthly plan if anyone wants to get ?
Yeah, it is rs. 199 per month. Below is the link to join:
ua-cam.com/channels/E4CwHclbqMgdYCH6lDQmDA.htmljoin
Sir if ler limit as per cam is INR 5 crore then it means initial margin?
It is risk factory that bank is taking on the total value
@@AnkushJain sir kya aisa ho sakta j kisi case mein mtm to ho but initial margin na ho... In most of SL that i haver seen there is limit, notional amount, mtm yes or no. Purpose and docs to be executed..zydatar mein initial cash margin mene facility table mein nahi dekhay
Ha ye possible hai.. bank prefer krte hain initial margin to safeguard their interest but agar mtm bhi hai TB b Kai bank call le skte hain
What is notional amount
Value of contract