Please explain the logic behind bank entering into FX sell-buy swap (in case of importer sum) and buy-sell swap (in case of exporter sum) in automatic cancellation by RBI topic
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Hello,
Provision of Automatic Cancellation by RBI
In this the customer doesn’t turn up on the due date, due to bank have to suffer.
On the maturity date, bank has contract to sell the Foreign currency to the customer, for this bank has entered a contract to buy the required currency from the inter -bank market.
But when customer doesn’t turn up, then still bank has to buy from inter- bank market after this bank has to spot sell that forex in the market.
After that bank thinks customer will come within 2 or 3 days therefore it has to enter into forward contract (for the purpose of selling to the customer if it comes after 2 or 3 days).
Therefore bank entered in sell – buy swap in case of importer and Vice-versa in case of exporter.
In exporter sum the exporter will sell the forex to the bank, but on the maturity customer will not turn up. But actually bank has entered already into the contract to sell forex in the inter-bank market.
On due date default by customer due to this bank has to buy spot to squad off the contract entered in the inter-bank market and sell forward(for the purpose of buying from customer).
I looking for positive reply.