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Dear sir,
Banks will not allow forward exchange/interest contracts to lapse if they are not used by a company because the forward rates are fixed and borrowers have to use it.
i.e., the banks will not allow a borrower to benefit from a decrease in interest/exchange rates. Compensating payments are made by the bank to other party if the interest/exchange rate is increased.I could not get the compensating payments? Is it only applicable to forward interest rate contracts?
Thanks,
With foreign exchange forward contracts, conversion takes place at the agreed forward rate – there are no ‘compensating payments’.
With forward rate agreements on interest rates, the interest rate is fixed, but the way it actually works is that the actual rate of interest applies and then there is a payment to or from the bank so as to end up with the FRA rate applying.
All of this is explained in full in my free lectures!!
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