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 CONVENTIONAL PROCESS FOR
FORWARD CONTRACT
9 Forward Exchange Cover (FEC) facility is available to
Importers/Exporters to mitigate exchange risks on
under Document Credits (DC) and Import/Export
Contract (Cont)

9 Importer/Exporter can enter into Forward Contract

for sale/purchase of foreign currencies with the Bank
at any time from the opening/registration of the
DC/Cont subject that the period of the FEC should
not exceed the validity of the DC/Cont

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9 FE cir 10/26.05.99):To prevent speculation by importers
and exporters, Banks are instructed that in case of closing
out of FEC with customers where underlying DC/Cont
has been cancelled or has expired un-utilized, the spot rate
for counter transaction would be lower/higher of those
prevailing on the date of booking of the FEC and the date
of close out.
9 FE cir 10/26.05.99):FEC for period less than one month is
prohibited,FEC for one month will be for fixed maturity,
in case payment is effected within one month this will be
done applying Spot selling rate prevailing rate on the date
of payment and the FEC will be closed out at the maturity
date.
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 Importer ² Forward Contract for
purchase of foreign currency
1) Day 1 Importer comes to MBL. He has to pay
US$ 1 million on Day 90. Wants to book forward
rate.
2) Prevailing Rate on Day 1 is 60.
3) MBL buys US$ 1million spot @ 60
4) MBL enters into a spot sale: forward buy swap
with another bank XYZ
5) XYZ Bank charges a Rs 1 premium
6) MBL adds its fee of Rs 0.10 and quotes a forward
rate of 60+1+0.1 = 61.1. MBL enters into a
forward sale contract with the client. ]
 Importer ² Forward Contract for
purchase of foreign currency CONTD.
ü) On Day 90, Importer pays 61,100,000/- to MBL and gets
US$ 1 million.
8) On Day 40, Importer indicates his inability to take the
delivery and wishes to close out
9) MBL sells $ to client on Booking Rate i.e. @ 61.1 and buys it
back at the lower of:
10) Prevailing Rate on Day 1 i.e. 60
Prevailing Rate on Day 40 say 61
11) Client will be charged 61.1-60 = 1.1 per $ i.e. 1,100,000
12) In case the prevailing rate on Day 40 was 58,
13) The importer will be charged 61.1-58 = 3.1 per $ i.e.
3,100,000
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 Exporter ² Forward Contract for sale of
foreign currency

1) Day 1 Exporter comes to MBL. He will receive

US$ 1 million on Day 90. Wants to book forward
rate.
2) Prevailing Rate on Day 1 is 60.
3) MBL sells US$ 1million spot @ 60
4) MBL enters into a spot buy: forward sale swap
with another bank XYZ
5) XYZ Bank charges a Rs 1 premium
6) MBL adds its fee of Rs 0.10 and quotes a forward
rate of 60-1-0.1 = 58.9
0
 Exporter ² Forward Contract for sale of
foreign currency CONTD.
ü) On Day 90, Exporter receives 58,900,000/- and pays US$ 1
million to MBL.
(ü )On Day 40, Exporter indicates his inability to give the
delivery and wishes to close out
8) MBL buys $ from the exporter on Booking Rate i.e. @ 58.9
and sell it back at the higher of:
(i) Prevailing Rate on Day 1 i.e. 60
(ii)Prevailing Rate on Day 40 say 59
9) Client will be charged 60-58.9 = 1.1 per $ i.e. 1,100,000
In case the prevailing rate on Day 40 was 62,
the exporter will be charged 62.-58.9 = 3.1 per $ i.e. 3,100,000

ü
 SHARIAH ALTERNATIVE FOR FORWARD CONTRACT
Importer ² Forward Contract for purchase of
foreign currency
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Day 1 Importer comes to MBL. He has to pay US$ 1M on Day

90 to his overseas supplier. Wants to book forward rate.
1) Prevailing Rate on Day 1 is 60.
2) MBL enters into an agreement to purchase w/ another
bank XYZ US$ 1M on Day 90 say @ 61
3) MBL adds its fee of Rs 0.10 and quotes a forward rate of
60+1+0.1 = 61.1 Rs/US$. MBL enters into an agreement
with the client to sell $1 million on Day 90.
4) On Day 90, importer pays Rs 61.1M to MBL.
5) MBL keeps Rs 100,000 as its fee and pays Rs 61M to XYZ
bank to receive US$ 1M.
6) MBL pays $1M to (or on behalf of) the importer 
 Scenario 2: Incomplete Transaction ²
Closing Out between the Booking and
Forward Delivery Date
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1) Enter into a forward sale agreement (say @

Rs59/US$) with BC bank to sell US$1M on Day 90
(to square its position with XYZ on Day 90).Client
will be charged upfront, the difference in this forward
rate and the Initial forward Rate for Day 90 (i.e. 61.1-
59=Rs 2.1/US$)

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 Scenario 2: Incomplete Transaction ² Closing Out
between the Booking and Forward Delivery Date
CONTD.
2) Therefore in the above case if the spot rate on Day 40 is
Rs 58/US$, according to this circular the client should
have been charged (i.e. 61.1-58=Rs 3.1/US$). To keep in
line with SBP·s requirement which is to prevent
speculation, MBL will charge the same difference,
however, the difference in Spot Rate for Day 40 and
Forward sale rate for day 90 (i.e. Rs 59-Rs58 = Rs 1/US$
in this case) will be given to charity and will not be
included in the gain/other income for bank

3) In addition, client will also be charged commission to

execute this additional transaction.

4) On Day 90 MBL will receive US$1M from XYZ and will

sell the same to BC.
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 Scenario 3: Transaction ² Premature Delivery

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1) Buy US$1M from the market at spot rate (say @

Rs64/US$)
2) Settle the contract with the importer by selling US$1M for
Rs 61.1 M as per the initial contract.
3) Enter into forward sale agreement with BC bank (say @
Rs63/US$)
4) Charge the Importer upfront the difference (i.e. Rs 1/US$)
5) In addition, client will also be charged commission to
execute this additional transaction.
6) On Day 90 MBL will receive US$1M from XYZ and will
sell the same to BC.
mm
 RELATED ISSUES

9 The need to identify scheduled banks to advise them

about our new format for the forward contract (our
contract is not a sale/purchase contract rather an
agreement to sell or purchase)
9 If the proposed Shariah alternative scheme is
followed, it appears that MBL may not comply with
SBP·s circular (FE cir 10/26.05.99). Do we need to
get SBP approval?

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 Exporter ² Forward Contract of
purchase foreign currency
1. Day 1 exporter comes to MBL. He will receive
US$ 1 million on Day 90. Wants to book forward
rate.
2. Prevailing Rate on Day 1 is 60.
3. MBL enters into an agreement to sell w/ another
bank XYZ US$ 1million on Day90 say @ 59
4. MBL subtract its fee of Rs 0.10 and quotes a
forward rate of 60-1-0.1 = 58.9. MBL enters into
an agreement to buy $1 million on Day 90.
5. On Day 90, client receives 58,900,000/- to MBL.
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 Exporter ² Forward Contract of purchase
foreign currency CONTD.
6. MBL keeps 100,000 as its fee and receives Rs
59,000,000 from XYZ bank in consideration of
US$ 1 million.
ü. MBL pays Rs 58,900,000 to the exporter and gets
US$ 1 million on Day 90
(ü ) Prior to or on the delivery date, client indicates
his inability to take the delivery and wishes to
close out the contract.
8. MBL can only close out the contract on Day 90.

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Exporter ² Forward Contract of purchase foreign
currency CONTD.
9. Prevailing Rate on Day 90 is 64.
10. MBL charges 100,000 from client as its fee.
MBL sells US$ 1 million to XYZ bank and
receives 59,000,000. It buys $ on spot at 64 and
loss 64,000,000-59,000,000 = 5,000,000 is charged
to the client. 
11. Prevailing Rate on Day 90 is 58.
12. MBL charges the client 100,000 as its fee. It
buys $ on spot at 58 and gains 59,000,000-
58,000,000 = 1,000,000.    &
 
›$„
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 SBP PPROV L
The transformation commission of State
Bank of Pakistan (with some other
Shariah scholars) approved the following
foreign currency forward cover
transaction. We could do the same
procedure for our Araboon/Hamish
Jiddiyyah transaction of shares.

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 CONCLUSIONS
9 Forward share transaction, should be through an
agreement/undertaking to sell or purchase at a future
date and it should not be a sale and purchase
agreements.

9 n amount or part of the total price may be given by

the bank to the other party (seller) in advance by way of
earnest money ( raboon/HamishJiddiyyah)against the
shares to be purchased at a future date.

9 If at the agreed time the party does not perform,

the(seller) can recover the differential to compensate the
loss suffered by him due to depreciation of the price
and adjust the earnest money there against.
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 Foreign Currency Forward Cover


 



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! The amount of foreign currency is needed for genuine

trade or payment transactions. The need will have to be
supported by appropriate documents so as to prevent
forward cover for speculative purposes.

ii) The forward cover shall be through an agreement to sell or

purchase and it shall not be a sale and purchase agreement.
It means that sale/purchase shall take place simultaneously at
the agreed time in future at the rate agreed upon initially at
the time of agreement to sell or purchase.
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Foreign Currency Forward Cover CONTD.
iii. While it will be permissible to fix the price of
foreign currency in terms of Rupees according to
the agreement, no forward cover fee shall be
recovered. However, (i) an amount may be
demanded by the bank from its client in advance
by way of earnest money against foreign currency
agreed to be sold at a future date or (ii) the fee
could be built into the sale/purchase rate.

iv. If at the agreed time the party does not perform,

the bank can recover the differential and adjust the
earnest money there against.
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