1. 1 FORWARDS Definition: n An FX Transaction in which two parties agree TODAY to exchange currencies on a SPECIFIC FUTURE date & at a SPECIFIC RATE. n The Future date is known as the forward date. n It is a Combination of Spot Rate and Interest Rates. n FORWARD PRICE = n BUY: Spot + (Spot x Higher Interest Rate/100 x FwdTenor/360) - ((1 x Lower Interest Rate/100) x FwdTenor/360) x Spot n SELL: Spot + (Spot x ((1 + Higher Interest Rate/100 x FwdTenor/360) / (1 + Lower Interest Rate/100 x FwdTenor/360) - 1)) n If BASE Currency Interest Rate is High then the Forward is at Discount; If BASE Currency Interest Rate is Low then the Forward is at Premium. n Can be used for both Hedging and Trading Purposes.

2. 2 FORWARDS Dissection

3. 3 FORWARDS HEDGING FX EXPOSURE BY SINGLE FORWARD DEAL Company XYZ Opened USD 250,000 LC, payable after 90 days. Current USDBDT Spot Rate is 66.25. The Customer feels that the USDBDT Spot rate may go as high 68.00 which will cause loss in overall business. The Customer wants to hedge its Forex risk. Assumptions = 90 Days USD Interest Rate = 3.50% = 90 Days BDT Interest Rate = 9.00% Break-Even Forward Selling Rate = => Spot + (Spot x ((1 + Higher Interest Rate/100 x FwdTenor/360) / (1 + Lower Interest Rate/100 x FwdTenor/360) - 1)) => 66.25+(66.25 x ((1+9/100 x 90/360) / (1+3.5/100 x 90/360)-1)) = 67.1530

4. 4 SWAP TRANSACTION DEFINITION n A transaction involving simultaneous Borrowing (Buying) and Lending (Selling) one instrument (currency or interest rate) over another. SWAP AVAILABLE IN BANGLADESH n FX SWAP - For Cash-flow Management

5. 5 FOREIGN EXCHANGE SWAP Definition n The simultaneous purchase and sale of a currency for two different dates n One of which is the spot delivery date (or before) and the other occurring after this date. n Funds are exchanged on each date. n Deal is Done in the form of BUY/SELL or SELL/BUY Key Purpose n Cash Flow Management n Money Market Arbitrage

6. 6 ILLUSTRATION : FX SWAP - FC / BDT n On Jan 01 CBC Sold USD 250,000 to its Import Client for 3 Months against BDT, Value Date Mar 30 @ 66.00 n The Client will be allowed to take delivery of the Forward on any day from the end of 2 months (Feb 28) till the maturity date (Mar 30). n CBC Purchased same amount of forward from Export Client for the same tenor (Value Mar 30), but without any early delivery option @ 65.00 –After 2 Months, the Import Client Claimed the Forward Amount USD 250,000.00

7. 7 ILLUSTRATION continues CASH FLOW OF CBC n CBC is Short USD 250,000.00 on Feb 28 since it has to Pay the Import Client from its Nostro Account. n CBC is Long USD 250,000.00 on Mar 30 since it will Receive USD from the Export Client in its Nostro Account. Feb 28Mar 30 (USD 250,000) + USD 250,000 n CBC has to do a USD 250,000 BUY/SELL SWAP Value Date Feb 28 and Mar 30 to match the cash flow: Feb 28Mar 30 (USD 250,000) + USD 250,000 +USD 250,000 (USD 250,000)

8. 8 ILLUSTRATION continues Calculation: (SpotRate x No. of Days) x (VariableCurrency Interest Rate - BaseCurrency InterestRate) --------------------------------------------------------------------------------------------------------- ((No. Of Days x BaseCurrencyInterestRate) + (360 x 100) If Spot USDBDT Rate = 66.00 Base Currency Interest Rate = 3.25% Variable Currency Interest Rate= 6.70% Number of Days= 30 (66.00 x 30) x (6.70 - 3.25) Swap Points = ----------------------------------- = 0.189237 ((30 x 3.25) + (360 x 100)) BUY/SELL Rate = 66.00 / 66.189237 Note: This is applicable when CBC prefers to use BDT in the SWAP. Alternative is also possible in case CBC prefers to use other currency i.e. GBP.