Introduction
A forward foreign exchange contract allows a customer and bank to agree today on an exchange rate for delivery on a future date.
The transaction does not always proceed exactly as originally expected. An exporter may receive payment early. An importer may postpone payment. An underlying transaction may be cancelled. A customer may fail to give instructions by the maturity date.
These situations create four important CAIIB areas:
forward delivery;
early delivery;
extension or cancellation;
swap cost, gain and related fund adjustment.
The current FEDAI Rules available on FEDAI's official website are the 10th Edition, shown by FEDAI as updated up to 30 May 2025. Rule 6 specifically covers early delivery, extension and cancellation of foreign exchange contracts.
For case-study questions, the main challenge is usually identifying what happened to the original contract and choosing the correct treatment.
Learning Objectives
After studying this topic, you should be able to:
identify proper and early delivery under a forward contract;
understand the treatment of an extension request;
select the correct rate for cancellation of purchase and sale contracts;
understand why early cancellation may require a forward TT rate;
distinguish exchange difference from swap cost or gain;
understand the treatment of matured contracts without customer instructions; and
analyse practical CAIIB cases involving exporters, importers and treasury adjustments.
Understanding a Forward Contract
FEDAI defines a forward contract as a foreign exchange contract deliverable on a future date beyond the spot date. Its duration is computed from the spot value date at the time of the transaction.
A customer may book a forward contract because the amount and timing of a future foreign currency receipt or payment are known or reasonably expected.
Typical cases include:
exporter expecting USD proceeds after three months;
importer required to pay EUR on a future date;
borrower having a permitted foreign currency liability;
customer hedging another eligible foreign exchange exposure.
The contract locks the relevant exchange relationship but still has to be dealt with correctly if the expected date changes.
Purchase Contract and Sale Contract
Before analysing cancellation or extension, identify the contract from the bank's perspective.
Contract | Bank's Position | Typical Customer |
|---|---|---|
Purchase Contract | Bank agrees to buy foreign currency | Exporter or foreign currency recipient |
Sale Contract | Bank agrees to sell foreign currency | Importer or foreign currency payer |
This distinction becomes critical when a contract is cancelled because purchase and sale contracts use opposite cancellation rates.
Forward Delivery
Delivery means performance of the forward contract according to its agreed terms.
Where the underlying transaction materialises as expected and delivery takes place as permitted under the contract, the transaction is completed at the contracted rate subject to applicable terms.
FEDAI also specifies transaction-related delivery dates. For example, for bills purchased, negotiated or discounted, delivery is linked to the date of negotiation, purchase or discount and payment of rupees to the customer. For export bills sent for collection, it is linked to payment to the customer on realisation. For import bills, it is linked to retirement or crystallisation of liability, whichever is earlier.
Option Period
Where a delivery date is not fixed, FEDAI permits an option period subject to the prescribed conditions. Under the current published rule, the option period of delivery cannot extend beyond one month, and contracts permitting an option must state the first and last delivery dates.
This gives a customer some flexibility when the precise date of the underlying receipt or payment is uncertain.
Early Delivery
Early delivery occurs when the customer wants to utilise the forward contract before its originally relevant delivery date.
Consider an exporter who expected export proceeds after three months but receives the funds earlier.
The exporter may request the bank to accept early delivery under the forward purchase contract.
Under FEDAI Rule 6.1, accepting or giving early delivery, unless otherwise restricted by FEMA provisions, is optional for the bank at the customer's request. Rule 6.2 provides for recovery or payment of the swap difference, if any, together with the applicable treatment of interest on fund outlay or inflow.
Why Does Early Delivery Create a Swap?
The bank may have arranged its own market cover based on the original delivery date.
If the customer now delivers earlier, two dates no longer match:
the date on which the customer performs the contract; and
the date for which the bank originally arranged its cover.
The bank therefore has to bridge this timing difference.
That adjustment is handled through a swap.
Economic Logic
Suppose:
Original contracted delivery → Month 3
but:
Actual customer delivery → Month 2
The bank needs to shift the effective foreign exchange position from Month 3 to Month 2.
The cost or gain arising from this date adjustment is the swap difference.
Swap Cost and Swap Gain
A swap in this context is an adjustment of foreign exchange positions between two different value dates.
It should not be confused with:
exchange margin;
cancellation loss;
forward premium itself; or
a new speculative transaction.
Swap Cost
If adjusting the bank's cover from one value date to another creates a cost, the relevant swap cost is recovered in accordance with the FEDAI rule.
FEDAI Rule 6.5 states that, in cases of early delivery, swap cost is recovered from the customer irrespective of whether an actual swap transaction is executed. The bank may recover such cost upfront or at the end of the swap period according to its discretion.
Swap Gain
Where the date adjustment results in a swap gain, payment to the customer may be made at the beginning or at the end of the swap period according to the bank's policy.
Interest on Fund Outlay or Inflow
The swap adjustment may also create a temporary rupee fund impact.
Fund Outlay
If arranging the swap causes an outlay of funds for the bank, FEDAI provides that the Authorised Dealer recovers interest on that outlay in addition to the applicable swap cost.
Fund Inflow
If the swap instead creates an inflow of funds, interest is payable to the customer. FEDAI provides that the applicable interest rate and threshold may be determined under the bank's own policy.
This distinction is important:
Swap difference concerns the exchange-rate effect of moving between value dates.
Interest on outlay/inflow concerns the temporary funding effect created by that adjustment.
Extension of a Forward Contract
An extension is required when the underlying exposure continues to exist but will occur later than originally expected.
For example:
an exporter expects delayed realisation of export proceeds; or
an importer receives an extension of payment terms from the overseas supplier.
A common exam mistake is to assume that the bank simply changes the maturity date of the existing forward contract.
That is not the FEDAI treatment.
Extension = Cancel + Rebook
Under FEDAI Rule 6.3, where a customer seeks extension:
the existing contract is cancelled at the appropriate buying or selling rate prevailing on the cancellation date;
the exchange difference between the contracted rate and cancellation rate is recovered from or paid to the customer as applicable; and
a new contract for the extended period is booked simultaneously at the current exchange rate.
The extension request must be made on or before the original maturity date.
Case-Study Reasoning
If an exporter booked a three-month forward purchase contract but now expects the export proceeds one month later:
the exposure still exists;
the required date has changed;
therefore the case points towards extension;
the existing contract is cancelled;
the cancellation difference is settled;
a fresh forward contract is booked for the revised period at the current rate.
Do not carry the old contract rate into the newly extended contract.
Cancellation of a Forward Contract
Cancellation becomes necessary when:
the underlying transaction is cancelled;
the customer no longer requires the hedge;
the customer wants to restructure the exposure;
an extension requires cancellation of the old contract; or
the contract matures without delivery and has to be dealt with under the applicable rule.
If cancellation is requested on or before maturity, FEDAI requires the difference between the contracted rate and the rate at which cancellation is effected to be recovered from or paid to the customer, as applicable.
The important CAIIB question is:
Which rate should be used to cancel the contract?
Cancellation Rate: Purchase Contract
Suppose the bank originally entered into a purchase contract.
This means the bank had agreed to buy foreign currency from the customer.
To cancel that contractual position, the opposite transaction is required.
Therefore, FEDAI specifies:
Purchase Contract → Cancel at TT Selling Rate
Why?
The original contract represents a foreign currency purchase by the bank.
Cancellation requires an opposite sale-side adjustment.
Hence the TT selling rate is used.
Cancellation Rate: Sale Contract
Suppose the bank originally entered into a sale contract.
The bank had agreed to sell foreign currency to the customer.
Cancellation requires the opposite side.
Therefore:
Sale Contract → Cancel at TT Buying Rate
Memory Rule
Think:
Purchase → Opposite is Sell → TT Selling
Sale → Opposite is Buy → TT Buying
Cancellation Rate Comparison
Original Contract | Bank Originally Agreed To | Cancellation Rate |
|---|---|---|
Purchase Contract | Buy foreign currency | TT Selling Rate |
Sale Contract | Sell foreign currency | TT Buying Rate |
FEDAI further provides that where cancellation takes place before maturity, the appropriate forward TT rate is applied.
This last point is a major numerical trap.
Why a Forward TT Rate Is Needed Before Maturity
Consider a forward contract that still has one month remaining when the customer asks for cancellation.
The original position relates to a future date.
If the cancellation were valued only at a spot rate, the remaining time value between today and the original maturity would be ignored.
The appropriate forward TT rate for the remaining period therefore becomes relevant.
For CAIIB case studies, always check:
Is cancellation before maturity?
How much time remains?
What is the appropriate buying or selling side?
Are forward points for the remaining period provided?
Only then should the cancellation difference be determined.
Exchange Gain or Loss on Cancellation
Conceptually, the cancellation adjustment compares:
the original contracted rate; and
the rate applicable for reversing that contract.
Exchange Difference = Contracted Rate − Cancellation Rate
This formula is used to identify the rate difference; whether it is payable or recoverable depends on whether the original transaction is a purchase or sale contract and the direction of the rates.
Refer to the Formula Section for a detailed explanation, variables, and solved examples.
The sign alone should not be memorised as “gain” or “loss”.
Instead ask:
Who originally had to buy or sell foreign currency, and what does it now cost to reverse that commitment?
Matured Contract Without Customer Instructions
A particularly important case arises when a contract reaches maturity but the customer neither delivers nor requests extension or cancellation.
FEDAI places responsibility on the customer to deliver or request extension/cancellation on or before maturity. In the absence of customer instructions, a matured contract is to be cancelled by the bank within a period not exceeding three working business days after maturity, in accordance with the bank's policy.
Swap cost, if any, is recoverable from the customer.
Treatment of Exchange Difference
Where cancellation after maturity occurs because of customer default, FEDAI provides that the customer is not ordinarily entitled to a favourable exchange difference but remains liable for an adverse exchange difference. However, a bank may pass a favourable exchange gain where it is satisfied that the delay in cancellation instructions resulted from factors beyond the customer's control; the justification must be recorded.
This is a high-value statement-based examination area because it contains both a general rule and an exception.
Proper Delivery versus Early Delivery in Export Bills
An additional case-study trap concerns export bills submitted earlier or later than the original delivery date.
FEDAI permits a bank, in specified circumstances, to treat such delivery as proper where there is no change in the expected date of realisation of foreign currency calculated when the contract was booked. In such a situation, the rules state that early realisation or late delivery charges need not be recovered.
Therefore:
Document submission date changed does not automatically mean early delivery.
The expected foreign currency realisation date is an important part of the analysis.
Case-Study Decision Framework
Use this sequence whenever a CAIIB case describes a change in a forward contract.
Step 1: Identify the Original Contract
Was it:
bank purchase of foreign currency; or
bank sale of foreign currency?
Step 2: Compare Actual Event with Contract Date
Has the transaction:
occurred as scheduled;
occurred earlier;
been delayed;
been cancelled; or
reached maturity without instructions?
Step 3: Decide the Treatment
Situation | Main Treatment |
|---|---|
Delivery as agreed | Deliver under contract |
Delivery before relevant date | Early delivery; examine swap adjustment |
Exposure exists but date moves later | Extension through cancellation and rebooking |
Exposure no longer exists | Cancellation |
Contract matures without instructions | Bank cancellation under overdue treatment |
Step 4: If Cancelling, Identify the Opposite Rate
Purchase contract → TT Selling
Sale contract → TT Buying
If cancellation is before maturity, use the appropriate forward TT rate for the remaining period.
Step 5: Check Additional Effects
Depending on the case, consider:
exchange difference;
swap cost or gain;
interest on fund outlay or inflow;
fresh forward rate on extension; and
overdue/default treatment.
CAIIB Exam Focus
1. Extension Is Two Transactions
This is a major exam concept:
Cancel existing contract + book fresh contract
Do not simply extend the old contracted rate.
2. Cancellation Uses the Opposite Side
The original contract determines the cancellation rate:
purchase → TT selling;
sale → TT buying.
3. Pre-Maturity Cancellation Uses Forward TT Rate
If maturity has not yet arrived, the remaining period matters.
Do not automatically use a spot TT rate.
4. Early Delivery Can Create Swap Cost or Gain
The contract rate may still be used for delivery, but the mismatch between the actual delivery date and original cover date requires separate swap treatment.
5. Exchange Difference and Swap Difference Are Different
Exchange difference arises when a forward contract is cancelled against a cancellation rate.
Swap difference arises from shifting foreign exchange exposure between value dates.
Do not combine the two automatically.
6. Outlay/Inflow Interest Is a Separate Adjustment
A swap may generate temporary funding consequences.
This can create an additional interest recovery or payment under the applicable FEDAI treatment.
7. Customer Must Act by Maturity
The customer should deliver or request extension/cancellation on or before the maturity date. Failure to do so changes the treatment of a matured contract.
Common Exam Traps
Trap 1: Extending the Original Rate
A learner simply changes the maturity date while retaining the old forward rate.
Why it is wrong: Extension requires cancellation of the original contract and simultaneous rebooking at the current rate.
Trap 2: Cancelling a Purchase Contract at TT Buying
The learner chooses the rate based on the original transaction.
Why it is wrong: Cancellation reverses the original position. A purchase contract is cancelled at TT selling.
Trap 3: Cancelling a Sale Contract at TT Selling
The same mistake occurs in reverse.
Why it is wrong: A sale contract is cancelled at TT buying.
Trap 4: Using Spot Rate for Every Cancellation
The learner ignores that the contract still has time remaining.
Why it is wrong: Pre-maturity cancellation requires the appropriate forward TT rate under the FEDAI rule.
Trap 5: Treating Swap Cost as Cancellation Loss
These are separate effects.
Why it is wrong: Cancellation loss arises from reversing the contractual exchange rate. Swap cost arises from changing value dates.
Trap 6: Assuming Early Delivery Has No Adjustment
The customer has delivered foreign currency, so the learner assumes the transaction simply closes at the contracted rate.
Why it is wrong: The bank's original cover may still relate to a later date, creating a swap adjustment.
Trap 7: Assuming Every Early Submission of Export Documents Is Early Delivery
Why it is wrong: If expected foreign currency realisation remains unchanged, FEDAI allows specified cases to be treated as proper delivery.
Trap 8: Assuming a Defaulting Customer Always Receives a Favourable Cancellation Gain
Why it is wrong: For a contract cancelled after maturity because of customer default, a favourable exchange difference is ordinarily not passed to the customer, although FEDAI provides an exception where circumstances beyond the customer's control are established and documented.
Memory Techniques
“Extend = Cancel + Rebook”
Never think of extension as merely changing a date.
EXTEND → CANCEL OLD → REBOOK NEW
“Cancellation Uses the Opposite”
Purchase contract → Sell to cancel → TT Selling.
Sale contract → Buy to cancel → TT Buying.
“Early Date = Think Swap”
If the customer delivers before the originally relevant forward date:
Early Delivery → Date Mismatch → Swap Adjustment
“Maturity Means Act”
By maturity, the customer should:
Deliver, Extend or Cancel
If none happens, overdue cancellation treatment becomes relevant.