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Part 4: Forward Contracts, Settlement Systems & Types of Forex Participants

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Part 4: Forward Contracts, Settlement Systems & Types of Forex Participants

Series: Understanding the Foreign Exchange (Forex) Market

12. Forward Contracts & Settlement Types

  • Forward Contracts: Agreement to buy/sell currency at a specified rate on a future date.
    • Fixed Date Forward: Settlement happens on a specific date.
      Example: Buy USD at ₹83.90 on 30 June 2025.
    • Option Forward: Settlement can occur within a time window.
      Example: Exporter can settle USD receipts anytime between 1–15 July 2025.
  • Overnight Contract: Buy today, deliver the next business day.
    Example: An overnight USD-INR deal booked on Monday settles Tuesday.
  • Tomorrow Contract: Buy today, settle the day after tomorrow.
    Example: Buy EUR today (Monday), settle on Wednesday.
  • Gross Settlement: Entire value of the transaction is settled.
    Example: $1 million traded = $1 million settled.
  • Net Settlement: Only the difference between receivables and payables is settled.
    Example: Bank A owes $5M and receives $4M → net settle $1M.

13. Types of Forex-Eligible Entities

Business Entities: Corporates and LLPs with foreign exposure.

Example: An Indian pharmaceutical exporter hedging EUR receivables.

Trusts: Permitted for specific inward/outward remittances as per RBI guidelines.

Example: A registered charity receiving grants from the UK.

Individuals: Residents and NRIs can transact under the Liberalised Remittance Scheme (LRS).

Example: A student remitting USD 25,000 for studying abroad.

Government & Government Entities: Allowed for sovereign transactions, foreign aid, loans, etc.

Example: Indian govt paying IMF dues in foreign currency.

Sports Bodies & Sportspersons: Foreign earnings, endorsement fees can be received and converted.

Example: Indian cricketer receiving AUD payment from an Australian club.

Other Persons: RBI permits forex dealings for journalists, professionals, or artists under specific categories.

14. Related Party Transactions

Transactions between group companies or relatives can involve forex exposure if cross-border in nature.

Impact: Must comply with FEMA, Transfer Pricing (for tax), and arm’s length pricing norms.

Example: An Indian subsidiary remits royalty to its foreign parent – must report to RBI and file Form 15CA/CB.

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