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Foreign Exchange & Related Products
Forward Exchange Contracts
Forward Exchange Contract (FEC) is a contractual agreement to buy or sell a specified amount of foreign currency against Ringgit Malaysia (RM) on a predetermined future date at an agreed exchange rate.
- Features
- Users
- Since the exchange rate is fixed at the time of contract, corporations very often use FEC to hedge against future exchange rate exposure
- Once hedged, the actual cost of payment for foreign purchase and/ or the actual receivables from export proceeds can be determined
- Importers are able to price goods at a certain profit margin and exporters are guaranteed the amount receivable in foreign currency
- Hedging FEC can minimize the cost of repaying a foreign currency loan by locking in the cost of borrowing and eliminating exchange rate risk of a foreign currency investment
- FEC line is required
Types of FECs:
1. Optional Forward
- A FEC rate is quoted to the customer for an agreed validity period where the customer can exercise the booked rate at anytime during the specified period
- Customer who is unsure of the expected payment or receipt dates usually requests this type of contract
2. Forward Forward
- A FEC rate is quoted to the customer for an agreed validity period where the customer can exercise the booked rate at the fixed future start date till the maturity date of the contract
- Customer who is unsure of the expected payment or receipts dates usually requests this type of contract
3. Fixed Forward
- A rate is normally quoted for a fixed maturity date where the customer is required to take up the FEC on the maturity date of the contract
- Customer who is certain of the expected payment or receipt dates usually requests this type of contract
Tenor of FECs:
1. Forward Sales by Residents
- For export proceeds and/or related freight/insurance charges, there is no restriction on the period of the forward contract but the maturity date of the forward contract must not be later than 6 months after the intended date of export or such longer period as may be permitted by the Controller;
- In all other cases, the maturity date should not be later than 12 months after the date the forward sale contract is entered into i.e. the entire period of the forward contract shall not exceed 12 months
- For import payments and/or related freight/insurance charges, there is no restriction on the period of the forward contract but the maturity date of the forward contract must not be later than 12 months after the intended date of import; and
- In all other cases, the maturity date should not be later than 12 months after the date the forward purchase contract is entered into, i.e. the entire period of the forward contract shall not exceed 12 months
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