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| Foreign Exchange |
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A foreign exchange contract is an immediately firm and binding contract between the customer and the bank for the purchase or sale of a specific quantity of foreign currency at a rate of exchange fixed at the time of making the contract for performance by delivery and payment at an agreed future time.
Foreign exchange contracts entered between bank and customer are legally binding. This is to protect the bank, for in the fluctuations in exchange rates the bank may lose money if it had bought or sold currency to meet the customer?s requirements which is not subsequently taken up by him.
Even with a formal contract, the risk remains in that the customer may not be able to fulfil it. Consequently limits are required for this type of business and the customer?s credit-worthiness should be evaluated like any other facility.
Depending on the standing of the customer the bank may therefore ask for a cash margin equivalent to a certain percentage of the outstanding balance of the currency to be purchased or sold by the bank.
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