Question

Is it possible for a MNC that has bought a currency forward or future contract to simply walk away at the settlement date if a new circumstance emerged prior to the settlement date and caused them not to need the contract any longer? What solution does this MNC have (without harming its credibility and reputation)? Prove it with an example along with numbers to support your explanation.

Answer 1

MNC that has bought a currency forward or future contract..It CANNOT simply walk away at the settlement date if a new circumstance emerged prior to the settlement date and caused them not to need the contract any longer.

Futures are exchanged traded contracts. They have a very high liquidity. If the MNC doesn't want the future contracts anymore then it can sell its future contracts on maturity date and book the order for either Profit or loss (depending upon futures price on that date).

Forward contracts are over the counter derivative and customisable in nature. It can sell the forward on maturity for that it should enter into reverse contract with the counter party (usually bank).

See the notes for example with numbers.

SBI and BOB are Indian banks in Example.
SBI- State Bank of India.
BOB- Bank of Baroda.

As we can observe in the example there is a loss on cancellation of ₹5000 for importer customer.

Lesson: If MNC don't want to lose its reputation and credibility then pay the applicable charges for dishonouring the contract.

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