Forums
Back
Interest Cost Doubt
AFM
Dear sir, The Outflow to the customer @ 65.4 is on 30.11.2024 and the Inflow from the Spot sell rate @ 65.22 is on 31.11.2024. Why are we calculating Interest for 31 days? Also, we are passing on the loss of 22000 to the customer (Our outflow is reduced by the loss of 22000 from 6540000) on 30.11.2024 so why Bank is actually charging Interest to the customer. Video Details ------------- Advanced Financial Management - AFM Foreign Exchange Exposure and Risk Management #138. Illustration # 82 - Early Delivery
Answers (10)
Thread Starter
Vanacharla Sai Pavan Kumar1. Dear sir, How Bank can earn Intrest as there is no any real cash flow to the bank from customer side even at agreed date 31.12.2024 and actual date 30.11.2024. How bank lost the interest because early utilization of funds.
It is notional interest. If you are buying a house and are supposed to pay money to building on day 90. but instead they ask you to pay on Day 0. You have lost notional interest for 90 days or not - same logic
True sir but but is just converter at day 0 or day 90 we have did transaction on instantaneous. The Bank never had never invested any money apart from entering into forward contracts.how bank has lost interest even nominal one as they take dollar and give rupees at day 0 or day 90
Sir the Bank is incurring some loss on the early delivery date (net cashoutflow) which as a customer is being charged to me on the same day . Then why the bank will charge Interest for rest of the contract period on Net cashoutflow to bank which I have compensated on the date of transaction
Thread Starter
Vanacharla Sai Pavan KumarSir the Bank is incurring some loss on the early delivery date (net cashoutflow) which as a customer is being charged to me on the same day . Then why the bank will charge Interest for rest of the contract period on Net cashoutflow to bank which I have compensated on the date of transaction
Because cash flow has time value and because of change in pre agreed schedule there is change in my funding position and i shall charge interest that i lose
Sir Interest logic for late delivery I have understood since customer will compensate the loss after 1 to 3 days after delivery. There is time value and fund has been impacted for those 1 to 3 days because of customer decision delay. But early delivery Interest why it is being charged I have not understood Sir. This is how it happens even in practical scenarios.
Thread Starter
Vanacharla Sai Pavan KumarSir Interest logic for late delivery I have understood since customer will compensate the loss after 1 to 3 days after delivery. There is time value and fund has been impacted for those 1 to 3 days because of customer decision delay. But early delivery Interest why it is being charged I have not understood Sir. This is how it happens even in practical scenarios.
Have you ever placed an FD and closed FD pre maturely - pls check that bank charges you in case you close your FD pre maturely - because they had a use of funds based on orignal contract and you violated it and they have lost some income and you have compensate it This is exactly how it happens in real life too w.r.t forex cancellations
Yes sir FD case is agreed bank primary objective itself is to earn Interest early withdraw of FD impacts funds position to discourage customers they impose penalty charges. But sir in forex transactions specially early delivery bank actually is not waiting for longer time. Bank purchase dollar from customer and we sell them in the spot market. Bank made some loss which it collect immediately from customer. Still if they want to charge customers for taking early delivery as supposed to due date. Bank can charge customer but why to call it interest instead some bank charges for early delivery
Thread Starter
Vanacharla Sai Pavan KumarYes sir FD case is agreed bank primary objective itself is to earn Interest early withdraw of FD impacts funds position to discourage customers they impose penalty charges. But sir in forex transactions specially early delivery bank actually is not waiting for longer time. Bank purchase dollar from customer and we sell them in the spot market. Bank made some loss which it collect immediately from customer. Still if they want to charge customers for taking early delivery as supposed to due date. Bank can charge customer but why to call it interest instead some bank charges for early delivery
Because it is on early utilization of funds being forced by customer and not on its own will
Your Reply