CASEOn 31st December, an exporter had a forward contract of USD 68,500 booked at INR 74.1825 that was expiring on the same day. He was unsure if he should cancel or rollover the contract because inwards were received in a different bank.
Apart from this, the exporter had an inward in a different bank of the USD 130,000 on the same day and was considering to convert the amount at cash rate.
SOLUTIONWe advised the client to cancel the forward contract booked for 31st December and convert the inward at spot rate instead of converting the amount at cash rate because 31st December is the financial year end for U.S. companies and cash spot is usually high during this time period because of lack of liquidity. The cash spot for that day was 0.10-0.15.
In order to cancel the export forward contract booked for 31st December, we had to buy USD 68,500.The prevailing cash spot for the day was 10 paisa, however, banks were reluctant to give anything more than 4 paisa. After negotiating the bank finally agreed to give the 10 paisa cash spot. This helped the client save INR. 4,110.
Furthermore, we advised the client to cover the USD 130,000 of inward payment value spot instead of converting the amount at value cash because he would be receiving a high cash spot (15 paisa). However, the client would receive the funds after 4 days (weekend plus two working days) and could have earned an interest of INR 6,240 in a liquid fund yielding 6% p.a. This helped the client save INR 13,260 which he would have to pay if he had covered the amount at cash rate.
All in all, MFE helped the client save INR 17,370 in a single transaction.
VALUE ADDITIONThe client was satisfied with our advice to not convert the amount at cash rate and convert it at the spot rate instead and that we managed to get the right cash spot.
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