There is now a free forward exchange market.26 Authorized foreign exchange dealers (banks and nonbank financial institutions) are permitted to negotiate forward exchange contracts in any currency. They may deal among themselves and with their customers, including both residents and nonresidents, at mutually negotiated rates. The Reserve Bank sets a limit for each dealer’s overall overnight foreign exchange exposure. However, in aggregate, dealers rarely use more than 25 percent of their approved limit.


There is now a free forward exchange market.26 Authorized foreign exchange dealers (banks and nonbank financial institutions) are permitted to negotiate forward exchange contracts in any currency. They may deal among themselves and with their customers, including both residents and nonresidents, at mutually negotiated rates. The Reserve Bank sets a limit for each dealer’s overall overnight foreign exchange exposure. However, in aggregate, dealers rarely use more than 25 percent of their approved limit.

Before October 31, 1983, banks provided restricted forward exchange facilities to Australian exporters and importers only. The Reserve Bank of Australia quoted forward margins on the spot U.S./Australian dollar exchange rate at which it was willing to buy and sell forward U.S. dollars with banks. At the close of each day, banks were required to clear their net forward positions with the Reserve Bank at those margins. From October 31, 1983, the Reserve Bank ceased to quote forward margins and banks were no longer required to clear their forward positions with it. Restrictions on the coverage of nontrade-related risks and the ability of nonbanks to operate in the official forward market were removed on June 25, 1984.

A parallel forward exchange market (the interbank “hedge” market) developed in the 1970s as a result of restricted access to the official forward market. In the hedge market, all transactions could be covered but balances were settled in Australian dollars only. However, deregulation of the foreign exchange market has meant that the level of activity in the hedge market has declined markedly.

In addition, foreign currency futures contracts have been offered by the Sydney Futures Exchange since March 1980.


Forward transactions are permitted up to 18 months. They have to be related to an authorized transaction in the case of residents. Forward premiums and discounts are left in principle to the interplay of market forces. The maximum maturity was raised from 12 months on November 1, 1986.


Belgium-Luxembourg has an official market and a free market. Foreign currency acquired in one market by banks may be sold in the other.

Nonbank residents may make forward purchases and sales of convertible currencies in the official market through authorized banks, provided that any foreign currency purchased is used for the authorized settlement of obligations within 15 working days from delivery. Exchange not used within that period must be resold in the official market. Profits resulting from forward contracts not used to cover authorized inward or outward payments through the official market must be surrendered to the Treasury.

Any resident or nonresident, including banks, may deal in the free market. Forward transactions, whether by banks or nonbanks, are uncontrolled and do not require a permitted underlying transaction. There is normally no intervention in forward exchange in either market.

There have been no major regulatory changes in the 1980s.


Forward exchange facilities exist for negotiating forward exchange contracts against all leading currencies in the domestic foreign exchange market and in leading international foreign exchange markets. Commercial banks deal in forward exchange with both residents and nonresidents. Forward exchange contracts may be negotiated to cover both commercial and financial transactions. There are no limits regarding contract maturities. All forward exchange transactions are negotiated at free market rates, and it is not the practice of the authorities to intervene in the market.

There have been no major regulatory changes in the 1980s.


Forward transactions involving purchases of foreign currencies against sales of foreign currencies may be concluded freely with domestic and foreign banks. Forward transactions that involve Danish kroner may also be concluded, but not for more than three years. Forward premiums and discounts are generally left to the interplay of market forces. Forward transactions that involve resident and nonresident purchases of foreign currencies against sales of Danish kroner must cover contractual payments for goods and services or payments on authorized loans and credits. There are no restrictions on forward transactions that involve resident and nonresident purchases of Danish kroner against sales of foreign currencies, other than the three-year limit on maturity.

A step toward further liberalization of the forward exchange market was taken on May 1, 1983, when the maximum maturity of forward cover on foreign currency debt service obligations was extended to three years from two years.

A major liberalization went into effect on January 1, 1984. Forward exchange operations not involving Danish kroner were completely deregulated and forward sales of foreign currency against Danish kroner were in practice deregulated. At the same time, forward covering of transactions in financial and commodity futures was permitted.


Authorized banks may deal—among themselves, with residents, and with nonresident banks—in U.S. dollars and in other convertible currencies. Nonbanks may obtain forward cover for authorized transactions only. Forward premiums and discounts quoted by authorized banks reflect interest rate differentials in various currencies. The Bank of Finland provided backup cover for U.S. dollar forward contracts to commercial banks at officially quoted rates until April 1980. An official quoting of ruble forward rates by the Bank of Finland was discontinued in May 1983.


Authorized banks in France and Monaco, which may also act on behalf of banks established abroad, are permitted to deal spot and forward in the exchange market in France. Authorized banks may also deal spot and forward with their correspondents in foreign markets in all currencies. The Banque de France does not intervene in the forward exchange market.

Nonbank residents may deal in the forward exchange market for specified operations only. The scope of these transactions was reduced on March 25, 1983, when forward cover relating to foreign currency transactions in commodity markets was prohibited for commodity futures and reduced to a maximum maturity of eight days on spot dealings. Beyond this, forward purchases of foreign currency were only permitted to cover a limited number of merchandise imports for a maximum period of three months. The forward sale of foreign currency has always been unrestricted.

Since 1985 there has been a considerable relaxation of the restrictions on transactions of nonbank residents in the forward exchange market. On March 2, 1985, forward cover was permitted for up to six months on all imports of goods invoiced in European Currency Units (ECUs). On April 15, 1986 forward cover of up to three months was permitted on all imports of goods invoiced in currencies other than ECU as well.

On May 21, 1986 the maximum allowable maturity of forward purchases of foreign currency was extended to six months. Forward cover was permitted for all imports including services. The right to cover commodity market transactions denominated in foreign currency in the forward exchange market was re-established. This permission encompassed operations in the commodity futures markets and arbitrage between the commodity exchanges of Paris and abroad. Companies were also allowed to cover their foreign currency debt service obligations.

On July 4, 1986 the limits on the maturity of forward exchange purchases relating to imports and debt service were lifted entirely.28

Federal Republic of Germany

Forward exchange contracts may be negotiated freely by both residents and nonresidents in all leading convertible currencies, both in the domestic foreign exchange market and at major international foreign exchange markets. This applies both to commercial and financial transactions. There are no officially fixed rates in the forward exchange market. All transactions are negotiated at free market rates.

There have been no major regulatory changes in the 1980s.


There is at present no forward market.


An independent forward exchange market did not develop in Ireland until 1979, when the parity link between the Irish pound and the pound sterling was severed. Until the end of 1980 the Central Bank of Ireland provided forward cover to commercial banks in order to foster development of the market. At present, the market is left largely to the commercial banks, but the Central Bank still intervenes intermittently. These interventions are intended to influence banks’ liquidity positions, not the forward exchange rate.

Access to the forward exchange market is strictly regulated. Forward cover is permitted only for trade-related transactions. Forward contracts must correspond in all aspects to the underlying commercial transactions. The minimum allowable maturity is 21 days, and the maximum 12 months. Forward cover must be effected within 15 days of assuming a foreign currency risk. This limit was reduced from 30 days on March 21, 1983, along with a tightening of the documentation requirements.


The monetary authorities do not, in principle, intervene in the forward exchange market; forward premiums and discounts are normally left to the interplay of market forces. Forward cover is freely permitted only for commercial transactions; cover for financial transactions requires authorization. On April 14, 1986, the maximum maturity of forward exchange transactions was extended from 12 months to 18 months for authorized banks. At the same time, residents were granted the right to buy currency options from authorized banks for all transactions involving goods and services.


Forward exchange contracts may be negotiated against foreign currencies quoted on the Tokyo exchange market and in other major international foreign exchange markets. There are no officially set rates in the forward market. Forward exchange transactions are based on free market rates. Japanese foreign exchange banks may freely negotiate forward exchange transactions among themselves and with nonresident banking institutions.

Deregulation of forward exchange trading became effective April 1, 1984. Forward transactions by nonbank residents no longer need to be related to underlying commercial transactions (real demand principle).

The limits set for banks’ net overall position and on spot and forward exchange positions were revised on November 1, 1984.

Since July 2, 1984, banks have been able to deal directly with each other in foreign exchange transactions excluding U.S. dollars. On February 1,1985, U.S. dollars were included, and since then, foreign exchange brokers have also been able to deal directly with overseas partners.29


Authorized banks are freely permitted to buy and sell convertible and inconvertible currencies, both spot and forward, against convertible currencies and inconvertible currencies. They are free to deal with residents and nonresidents, whether banks or nonbanks. Forward exchange contracts are not limited as to delivery period nor is an underlying transaction required. Residents may conclude forward transactions with authorized banks for any period. The intermediation of authorized banks is not obligatory in those forward currency transactions in which the guilder is not involved.

There have been no major regulatory changes in the 1980s.

New Zealand

Authorized foreign exchange dealers are permitted to conclude freely with their customers forward exchange contracts to buy or sell foreign currencies in exchange for New Zealand dollars, irrespective of the purpose for which the funds are required or the sources from which they are obtained. They are subject only to prudential exposure limits agreed between the dealer and the Reserve Bank of New Zealand. These forward contracts may be for either a fixed term or optional delivery dates.

The Reserve Bank does not maintain margins for forward exchange transactions. Authorized foreign exchange dealers are free to set their own rates of forward transactions with their customers.

General access to the forward exchange market for residents and nonresidents was established in 1979. Until August 26, 1983, the Reserve Bank of New Zealand quoted official forward premiums and provided backup cover to commercial banks.


Forward premiums and discounts are left to the interplay of market forces. Forward transactions with nonbank residents by authorized banks and foreign exchange brokers must have a commercial basis.

On July 9, 1984 the Norges Bank extended general authorization to commercial banks to write foreign currency options for nonbank residents. Option contracts can be employed under the same rules applied to forward transactions.


Authorized banks are allowed to operate in foreign markets for spot and forward transactions related to commercial operations, and the amortization of financial credits. Forward cover may be provided to residents for all permitted foreign exchange receipts, import payments, current invisible transactions, and amortization payments. Forward contracts may not exceed 12 months, and forward purchases and sales of foreign currency are restricted to currencies admitted to the Madrid foreign exchange market and the ECU. The terms of the forward contract must coincide with the terms of the commercial or financial transaction being covered. The forward position of an individual bank at the close of each day must not reflect a net buying or selling position in U.S. dollars in excess of US$1 million; in French francs, deutsche mark, Swiss francs, Italian lire, and Japanese yen in excess of US$250,000 and in each of the other convertible currencies in excess of US$100,000. In addition, most commercial banks can freely purchase foreign exchange in the spot market to cover a forward contract 12 months prior to the maturity of contract.

The present regulations governing forward exchange trading have been in effect since April 1, 1980.30 Permission to engage in forward transactions with nonresidents was given to commercial banks on January 1, 1981. On June 15, 1982, the banks were allowed to cover their forward positions in the spot market six months before the due date. The original period was 15 days; in 1986 the limit was raised to 12 months.


Authorized banks may conclude forward exchange transactions with residents in foreign currencies against Swedish kronor without restriction (on each occasion when a forward transaction is allowed, currency options may be concluded alternatively). Forward transactions may be concluded only to cover payments for which an agreement exists. However, export firms may make forward sales for settlement on the envisaged date of payment or, when tendering, on the expiry date for tendering. Authorized banks may without exceptions conclude with residents forward transactions in any foreign currency against another foreign currency.

Authorized banks may buy from and sell to other authorized banks, foreign banks, and nonresidents, forward, any foreign currency against another foreign currency or Swedish kronor. Limits are placed on the net foreign exchange holdings, spot and forward, of each authorized bank.

On October 20, 1981 the prohibition of forward transactions with foreign banks in the currency of a third country was lifted.

Forward exchange transactions between authorized banks and nonresident nonbanks were permitted in March 1985.

On February 1, 1987, all forward foreign exchange transactions were permitted without restrictions, provided that they take place through an authorized bank. Authorized banks were allowed to enter into forward contracts with nonresidents for periods exceeding 12 months.


There is an active forward exchange market in Switzerland. Both residents and nonresidents may freely negotiate foreign exchange contracts with banks in all currencies for both commercial and financial transactions. No official fixed premium and discount rates are applicable to forward exchange contracts. All forward exchange transactions are negotiated at free market rates. Limits on forward sales of Swiss francs to nonresidents were lifted on March 11, 1980.

Until June 15, 1981, a gentleman’s agreement between the Swiss National Bank and commercial banks was in effect, by which commercial banks agreed to refrain from transactions of an obviously speculative nature against the Swiss franc.

A currency option scheme under which exporters were able to purchase currency options from the Swiss National Bank to cover up to 40 percent of their export proceeds for up to two years forward was discontinued on November 30, 1981.

Effective April 1, 1985, the Federal Government ceased to provide exchange risk insurance to exporters.

United Kingdom

Banks are allowed to engage in spot and forward exchange transactions in any currency, and they may deal among themselves and with residents and nonresidents in foreign notes and coin at free market rates of exchange.

There have been no major regulatory changes in the 1980s.

United States

There is a free forward exchange market. Commercial banks offer forward exchange facilities to both residents and nonresidents. This applies both to commercial and financial transactions. There are no limits on contract maturities. Forward exchange rates fluctuate in response to market conditions.

There have been no major regulatory changes in the 1980s.

Appendix II Forward Exchange Systems in Selected Developing Countries

Exchange Rate Guarantees and Officially Managed Forward Cover at Noncommercial Terms


Real Exchange Rate Insurance Scheme

Introduced in August 1986, this scheme was designed to compensate exporters of specified products for declines in the real price of exports, including changes in export taxes and rebates, that might accrue between dates of contracting and shipment. In the case of contracts containing a price readjustment clause, the reimbursement rate would be set at 100 percent. In the case of contracts not containing a price readjustment clause, 90 percent of the decline in the real price would be reimbursed. However, the Argentine authorities do not expect that any payments will need to be made under the scheme, because of the policy of avoiding a real appreciation of the austral.

Exchange Rate Guarantees for Private External Debt

In June 1981, the Central Bank introduced a scheme under which private sector borrowers could obtain exchange rate guarantees for new loans contracted, or old loans extended, for a period of at least 540 days. A fixed premium, with an intentional subsidy, was charged for this exchange rate insurance during the first 180 days of the contract. For the remainder of the contract, the premium was set in relation to interest or inflation differentials vis-á-vis the U.S. dollar; in the event this provision also resulted in a large subsidy to domestic borrowers. About US$5 billion in guarantees were contracted under this system before it was terminated in December 1981. In July 1982, immediately after a large devaluation of the peso, another scheme was introduced under which private sector debtors could obtain guarantees on loans outstanding prior to the devaluation, provided that they obtained at least a one-year extension of the term of the loan. The guaranteed rate was the predevaluation rate adjusted for subsequent inflation differentials, although even more generous terms were offered subsequently. Loans covered by guarantees issued in 1981 could be rolled over under the new scheme. By the time this scheme was closed in October 1982, more than US$10 billion, or two thirds of the debt of the private sector, was covered by an exchange rate guarantee.

The first maturities on loans covered by exchange guarantees issued in 1981 fell due in December 1982, by which time the average guaranteed rate on such loans was one tenth of the actual official rate. Since the Central Bank neither had the foreign exchange to cover the repayment of these loans nor was willing to permit the monetary expansion which would have resulted from renewal of the loans by the private sector at the current exchange rate, it issued regulations requiring that all loans covered by guarantees issued in 1981 be rescheduled on maturity, according to specified minimum terms. The foreign creditor was given the option of either accepting Government of Argentina securities denominated in U.S. dollars with specified grace and maturity periods or renegotiating the loan directly with the private sector on comparable terms. In the latter case, U.S. dollar-denominated securities would be issued in guarantee. Under either option, the private sector debtor would pay the Central Bank the domestic currency required to cancel the loan at the guaranteed rate. In June 1983, the same mandatory rescheduling provisions were extended to loans covered by the 1982 guarantees.

By the end of 1983, US$4.4 billion in loans covered by the exchange guarantee had fallen due, and the debtors had paid the Central Bank the domestic currency required to cancel the loan and guarantee contracts. However, most of the related U.S. dollar-denominated securities were not taken up until 1984 because there had been delays in reaching agreement with creditors on the option to be taken. A further US$3.1 billion in loans covered by the exchange guarantee fell due in 1984–85. The obligations due to commercial banks were rescheduled as part of a refinancing package, through the issuance of U.S. dollar-denominated notes; obligations to other creditors were refinanced separately. Loans covered by guarantees that fell due in 1986 were rescheduled by issuing similar notes with a ten-year maturity. Obligations due to commercial banks were rescheduled as part of the 1987 rescheduling agreement, while obligations to other creditors were to be refinanced separately.


Forward Facilities at Regulated Terms

Forward facilities with regulated premiums are available at authorized banks as follows: for periods of up to six months for export proceeds and import payments; for three months for remittances of surplus collection of foreign shipping companies and foreign airlines; and for settlement in Asian Monetary Units (AMUs) for transactions under the Asian Clearing Union. Authorized dealers are not permitted to pay any premium for purchases of forward exchange above the spot rate. For commercial forward sales, they are allowed to charge taka 0.08 per U.S. dollar equivalent over their spot selling rate at all maturities up to six months. At the end of December 1986, this amounted to a premium of 0.3 percent.

When the designated dealers sell foreign exchange forward for imports under official loans, credits, or grants, they are allowed to charge 5 percent in addition to usual commissions and charges. The Central Bank provides forward cover to authorized dealers at a premium also fixed at taka 0.08 per U.S. dollar equivalent over its spot selling rate. Because of the regulated premium, which is low in relation to international interest differentials, the dealers cover all their authorized forward exchange commitments with the Central Bank. The regulated premium has in recent years been smaller than the rate of depreciation of the taka against most of the currencies in which forward facilities are available, and private sector importers will usually have profited from taking such cover while the Central Bank will have incurred losses. However, available data for the period 1983–85 show that the volume of forward exchange purchases by the Central Bank exceeded the volume of its forward exchange sales to importers by large margins, because imports under the Secondary Foreign Exchange Market are covered against the exchange risk by the requirement of advance purchase of U.S. dollar/pound sterling funds. As a result, the Central Bank during this period offset its losses through the gains made from purchases of foreign exchange from exporters (see Chart 1 and Table 6).

Table 6.

Bangladesh: Spot and Forward Exchange Rates Against the U.S. Dollar, 1983–87

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Source: Data provided by the Bangladesh authorities.

The buying rate for forward exchange is identical to the buying spot rate.

Interest rate for deposits with deposit money banks.

London interbank offered rate on six-month U.S. dollar deposits (period averages).

May 24, 1987.

Exchange Rate Fluctuations Burden Absorption Scheme

The solvency of the Exchange Rate Fluctuations Burden Absorption Scheme (EFAS), which was introduced in July 1983, is guaranteed by the Government. The scheme is composed of two parts. Under the first, the Government will provide exchange rate guarantees to projects in which foreign currency loans had been or will be disbursed between July 1983 and June 1988. The scheme is available to both public and private sector borrowers at an annual charge of 2.5 percent of the outstanding amount of the loan. Effective from March 28, 1987, foreign currency term loans channeled through the nationalized commercial banks on the basis of relending by the Government have also been made eligible for cover under EFAS. Under the second part, lending institutions are permitted to convert part of exchange losses on foreign currency loans outstanding at end-June 1983, on which overdue repayments exist, into preferred shares or debentures. In April 1986, it was announced that only loans disbursed by the three development finance institutions would be eligible for cover under the EFAS. In fact, however, few enterprises had subscribed to EFAS as of December 1986.

Costa Rica

At the end of 1980, a fixed exchange rate was replaced by a flexible exchange rate system. In order to alleviate the financial burden on both the private and public sectors of the resulting sharp depreciation of the colon, the Central Bank issued, beginning in mid-1981, exchange guarantees at the previous official exchange rate of C 8.60 per U.S. dollar for a number of foreign exchange transactions. For the public sector these transactions included foreign currency expenditures of the central government and imports of petroleum, medicine, and wheat. For the private sector these included unpaid 1980 imports, debt repayment of registered capital, pre-export financing of coffee, and student remittances.

A large proportion of the guarantees took the form of U.S. dollar-denominated certificates of deposit (CDs) issued by the Central Bank against local currency deposits converted at the previous official exchange rate. These CDs were to be redeemed in equal semiannual installments over three years, with the first installment falling due in October 1981. As of June 30, 1982, however, the Central Bank had been unable to make any payments, either in principal or in interest, and the amount of CDs outstanding was US$325 million. A subsequent increase in the amount outstanding, to US$373 million at the end of 1983, reflected mainly the capitalization of interest. Since most of these CDs were issued at the exchange rate of C 8.60 per U.S. dollar, they gave rise to potential exchange losses equal to the difference between that rate and the prevailing banking exchange rate, which was C 43.15 per U.S. dollar at the end of 1983. Such potential losses amounted to more than C 12 billion—roughly equivalent to the Central Bank’s total liabilities to the private sector—at the end of 1983.

Apart from the potential losses arising from the issue of CDs, the amount of exchange subsidies actually paid by the Central Bank is estimated at around C 4 billion in 1981 and C 2 billion in 1982, of which C 0.9 billion and C 1.4 billion, respectively, accrued to the public sector. The losses in 1981 and 1982 taken together were equivalent to the total outstanding currency issue at end-1982. The value of exchange subsidies declined to C 0.5 billion in 1983 (C 0.4 billion to the public sector), and all transactions with access to foreign exchange at the previous official rate were virtually eliminated in that year.

Monetary policy during 1981–83 was largely directed at neutralizing the expansionary impact on domestic credit of the large exchange losses incurred by the Central Bank. For this purpose, the Central Bank relied heavily on the placement of stabilization bonds with the private sector (the amount outstanding rose from C 0.3 billion at end-1980 to C 5.2 billion at end-1983) and the absorption of excess commercial bank reserves. The interest cost of these operations has resulted in further large operating losses for the Central Bank after 1982.


In exceptional circumstances, the Central Bank may provide forward exchange cover in U.S. dollars for commercial transactions to a limited number of public sector enterprises, at a premium of 3 percent over the spot rate in the “official” market. In practice, the Central Bank does not do so.


The Exchange Credit Guarantee Corporation of India Limited administers an official insurance scheme that provides forward exchange cover for exports of engineering goods, turnkey and civil construction contracts, and service contracts where payments are to be received in installments deferred beyond 12 months. The cover is offered in French francs, deutsche mark, Japanese yen, pounds sterling, Swiss francs, U.S. dollars, and UAE dirhams from the date of a bid up to 15 years after the award of a contract.


Since January 1979, Bank Indonesia has made available to banks and other financial institutions forward cover in the form of foreign exchange/rupiah swaps at preferential forward premiums on foreign exchange for specified purposes. (See Chart 1 and Table 7.) The swap entails a spot sale of foreign exchange to Bank Indonesia, matched by a forward purchase at a price more favorable than that ordinarily available from commercial banks. The facility was initially available to cover import transactions and short-term borrowing, but since January 1983 the swaps have been provided to cover bona fide offshore borrowing only. Until October 1986, the volume of swaps was subject to ceilings that applied both to the total volume outstanding and to individual financial institutions. The ceilings were then eliminated, while the terms on which the swaps were offered were made less advantageous.

Table 7.

Indonesia: Interbank Swap Transactions Against U.S. Dollars, 1983–871

(In percent per annum)

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Sources: Data provided by the Indonesian authorities; and Fund staff estimates.

Representative three-month swap effected through foreign exchange banks and nonbank financial institutions at the end of the month.

Bank Indonesia foreign exchange swap margin.

Rupiah interbank rates; average of rates at which transactions were conducted, weighted by volume of each transaction.

Bank Indonesia initially set charges on swap contracts at 2.5 percent per annum, with banks free to set the premiums charged on the corresponding transactions with their clients. In 1981-82, however, the demand for swaps increased sharply as speculation against the rupiah intensified and interest differentials and the forward premiums charged by banks widened. Thus in October 1982 Bank Indonesia imposed a limit of 2 percent per annum on the margin above the Bank Indonesia premium that banks could charge on any forward transaction backed by a Bank Indonesia swap. In February 1983, this limit was reduced to 0.25 percent; and at the same time Bank Indonesia raised its swap charges to a range of 4.25–41.75 percent, depending on maturity. (Bank Indonesia swaps have maturities of 30–180 days, but are renewable.) Bank Indonesia swap charges were raised again in March 1983, to a range of 4.75–5.75 percent. The volume of swap contracts outstanding subsequently fell sharply, from about US$2 billion in March 1983 to about US$1 billion in July, partly because of a narrowing of interest differentials and commercial forward premiums following a devaluation of the rupiah. After 1983, however, the demand for Bank Indonesia swaps again increased, and the ceilings referred to above were frequently binding. In 1984 and 1985, quarterly data show that the volume of swaps outstanding ranged between US$2.3 billion and US$2.6 billion. In October 1986, Bank Indonesia raised the minimum charge on the swap facility to 8 percent per annum (comparable with uncovered interest differentials vis-á-vis the U.S. dollar) and reduced the maximum fee to be charged by banks to 0.125 percent. At the same time, the ceilings on the volume of swaps were eliminated. Nevertheless, in early 1987 total swaps outstanding rose sharply to US$3.1 billion.


An exchange rate insurance scheme was introduced in 1981 to enable exporters to obtain cover against unfavorable movements in real exchange rates. The scheme, administered by the Foreign Trade Insurance Company (FTIC), covers exporters’ value added. In return for a premium based on the value added of their exports, exporters receive cover against any real appreciation of the sheqel in relation to an export-weighted basket of the currencies of Israel’s five major trading partners (the U.S. dollar, pound sterling, Netherlands guilder, French franc, and deutsche mark). The premium rate is established on the basis of average expected inflation in the partner countries and the relationships among the forward exchange rates of the currencies constituting the basket. The scheme is intended to be self-financing, since although exporters would receive payments from the FTIC if the real depreciation was less than expected, they would make payments to the FTIC if it were greater. In practice, however, the scheme has operated at substantial losses: these amounted to US$312 million in fiscal year 1984/85 and US$276 million (1.3 percent of GNP) in 1985/86. These losses are charged to the government budget. As of August 1985, compensation to insured exporters has been subject to a limit of 11 percent of value added.


Commercial banks are authorized to enter into forward exchange contracts with their customers for up to six months at premiums or discounts administratively set by the Central Bank. Since the beginning of 1985, there has been a zero discount on forward sales of shillings, but a sizable premium on forward purchases. Forward cover is permitted for trade transactions only. Commercial banks may also cover their forward exchange contracts in outside markets; they are not permitted to hold uncovered positions. In recent years, total forward purchases of foreign exchange averaged US$44 million per month, while forward sales were virtually nil.


Before June 1981 commercial banks provided forward cover to exporters and importers at commercial terms, usually for up to six months. The forward rates quoted were based on interest differentials; the banks covered their own forward positions through balances abroad. Meanwhile the Central Bank provided foreign exchange cover for importers, also usually for up to six months, under a bulk buying scheme operated by the Government. The Central Bank’s forward rates were obtained by applying a fixed percentage charge—in effect, an insurance premium—to each spot rate. In calculating the charge, the Bank considered such factors as the cost of providing the facility and the opportunity cost of maintaining funds in the currencies concerned during the period of the forward commitment. Forward contracts pertaining to the sale of a currency by the Bank were normally covered by earmarking a portion of the Bank’s external reserves in that currency for the duration of the contract.

Under a new system introduced in June 1981, the commercial banks must cover with the Central Bank any forward contracts entered into with their customers in the principal currencies. Thus any contract concluded between a bank and a customer should be accompanied by a similar contract between the bank and the Central Bank. The forward facilities that the Central Bank offers to the commercial banks are intended to provide cover for firm contractual commitments of a current nature—that is, payments/receipts pertaining mainly to merchandise trade but also including other current account transactions. Capital transactions are excluded. The Central Bank assumes all the exchange risk entailed in its forward contracts with the commercial banks. The forward rates quoted daily by the Central Bank are for up to six months; one-year quotations are also issued on request. In August 1983 (the latest date for which data are readily available) the Central Bank’s six-month forward rate against the U.S. dollar represented a forward premium on the lira of 1.8 percent per annum, compared with an uncovered interest differential of more than 5 percent at that time in favor of U.S. dollar-denominated six-month deposits. The forward rates quoted by the commercial banks should vary from the Central Bank’s rates only by the banks’ handling charges and profit margins. When adjustments to the rates are effected, the Central Bank immediately communicates the revised rates to the banks. The Central Bank has continued to provide forward cover directly to government departments and various parastatal bodies in respect of imports.


Forward exchange facilities in pounds sterling, French francs, and U.S. dollars are made available by the Bank of Mauritius for a limited number of transactions: for firms operating in the Export Accessing Zone and for banks engaged in foreign borrowing for on-lending to the sugar sector. The maximum period for forward cover is six months; the forward rates are based on a uniform margin of 3 percent per annum.


A forward exchange cover facility was established by the authorities effective June 1, 1979; the facility is available for exports as well as imports of items benefiting from special customs arrangements.


All foreign exchange transactions by the public (including forward transactions) must be conducted through authorized dealers and money changers at rates established by the central bank. Authorized dealers may enter into forward exchange contracts for private commercial transactions, generally for up to six months, and they may cover their permitted transactions in foreign exchange markets abroad or with their agents in the countries concerned. In addition, the central bank provides official forward cover to authorized dealers. The central bank’s forward margins were kept unchanged in absolute terms for more than twenty years up to April 1987. On May 3, 1987 the central bank’s buying rate for U.S. dollars up to six months forward was the same as its spot buying rate, while its buying rate for U.S. dollars between 6 months and 12 months forward implied a forward discount on the dollar of 3 percent per annum at the longest maturity. Its selling rate, however, for 6- and 12-month maturities, implied a forward premium on the U. S. dollar of 3 percent per annum. Meanwhile, there was an uncovered interest differential in favor of rupee bank deposits vis-á-vis Eurodollar deposits of about 7 percent, which would be the order of magnitude of the forward premium on the U.S. dollar if covered parity held.

There is an official exchange rate cover scheme for private sector debtors administered by the central bank. Upon payment of annual fees ranging from 3.0 percent in the case of the pound sterling to 7.9 percent for the Swiss franc, the exchange risk on foreign currency loans and suppliers’ credits will be covered by the central bank. (Before a revision to the scheme in May 1987, the fee was 3 percent for all currencies.)


In April 1984, a foreign exchange risk insurance scheme (FERIS) was introduced to encourage the private sector to use foreign loans for export-oriented projects by providing insurance against exchange risk for both interest and principal. Private investors had been reluctant to make use of such resources as those provided by the World Bank owing to the exchange risk attaching to them. FERIS is administered by the central bank, but is a financially independent entity. The scheme is intended to be self-financing over its lifetime, although there was originally provision for subsidies from the budget. Under the scheme, if a foreign loan was on-lent by, say, the Turkish Development Bank to the private sector, with cover by FERIS, the private sector borrower would be charged a domestic interest rate equal to the interest rate on the foreign loan, plus a projected inflation differential between Turkey and the appropriate foreign comparator, plus 4 percent management fee charged by the development bank minus a 7 percent subsidy from the Interest Rate Difference Rebate Fund. The resources accruing to FERIS from the charging of interest on this basis were expected to enable FERIS to cover the difference between the lira cost of maturities and the lira cost of the loan at the time it was contracted. In 1985, the authorities announced that the 7 percent subsidy would henceforth apply on a selected rather than general basis. Only limited use has been made of the scheme.

Official and Managed Forward Exchange Facilities at Quasi-Commercial Terms


Between December 1981 and May 1982, in an attempt to conserve its reserves, the Central Bank undertook 180-day foreign currency swap arrangements with banks and other private sector borrowers in Argentina, and by the end of 1982 there were US$ 1.4 billion of such swaps outstanding. The Central Bank did not have the reserves to unwind these operations as they fell due. After mandating several short-term rollovers, it announced in June 1983 that all loans covered by swap contracts, apart from certain trade-related swaps undertaken at end-1982, could be rescheduled on specified terms. However, the scheduled principal repayments on the rescheduling were subsequently postponed by means of 180-day rollovers. In 1985 new terms for the rescheduling of swap obligations falling due in that year were announced in accordance with the commercial banks’ rescheduling of private sector obligations. Similarly, the 1987 agreement with creditor banks provides for the rescheduling of swap-related obligations. An estimated US$700 million in swap obligations would be rescheduled under the agreement.

People’s Republic of China

Forward exchange transactions are permitted only in connection with underlying trade transactions. Forward exchange facilities are provided by banks, and forward exchange rates are published for 15 currencies. Rates are quoted for one to six months, but transactions can be renewed for a further six months. China does not use a system of forward premiums and discounts, but instead applies forward charges to the respective spot rates. forward charges reflect interest rate differentials and trends in international markets in the currencies concerned.


Official forward exchange rates are quoted by the National Bank for convertible currencies for which spot rates are quoted on a daily basis. Forward rates are formed by adjusting the official spot rates by percentage differentials set by the Bank for various maturities between 7 and 30 days and for 360 days. The Bank is prepared to buy (or sell) currencies forward from (or to) enterprises having foreign exchange receipts (or expenditures) arising from foreign trade.


Exchange rates for forward purchases of U.S. dollars, pounds sterling, deutsche mark, and Japanese yen, based on the latest available rates and trends in international markets, are announced daily by the Reserve Bank. The Reserve Bank stands ready to purchase these currencies and the currencies of certain member countries of the Asian Clearing Union (ACU)—forward (as well as spot)—and to sell pounds sterling, U.S. dollars,32 and ACU currencies spot. On December 30, 1986, the Reserve Bank’s rates were US$7.80 per Rs 100 for buying spot, US$7.76 for selling spot, and US$7.80 for buying three months forward.

Authorized dealers are permitted to enter into forward exchange contracts in convertible currencies at exchange rates announced by the Reserve Bank for trade-related and certain service-related transactions. Maturities of such forward contracts can be no longer than six months, but they may be extended on a rollover basis depending on the circumstances. In addition, forward exchange cover may be offered for specified foreign currency loans approved by the Reserve Bank for imports of capital goods. Cover for the full amount of debt service is permitted on a rollover basis, provided the loans have been contracted at a fixed rate of interest, with payments to be made in one currency. When a floating rate of interest is applicable to a loan, authorized dealers may enter into forward exchange contracts for the principal of the loan and for the current period interest payments. In the case of multiple currency loans, authorized dealers may enter into forward contracts for only one repayment installment at a time, including interest payable at the next rollover date. Contracts for forward sales of foreign exchange to foreign airlines, shipping companies, or their agents are permitted up to the net amount of surplus, subject to the Reserve Bank’s approval, for up to two months from the date on which the application for approval of remittance has been submitted.

The Reserve Bank provides forward cover to authorized dealers through purchases of sterling for initial maturities of up to 9 months (extendable up to 12 months), purchases of U.S. dollars up to 12 months, and purchases of deutsche mark and Japanese yen up to 6 months. The contracts are on a monthly option basis, that is, with options to deliver on any day within the month in which the contract is due for delivery. On a similar basis the Reserve Bank also purchases, from authorized dealers, the currencies of ACU member countries other than Nepal.


The Trust Fund for the Coverage of Foreign Exchange Risk (FICORCA) was established by the authorities in 1983 to enable the Bank of Mexico to help the private sector deal with the settlement of payments arrears to foreign suppliers, as well as to provide a framework for the refinancing and forward exchange coverage of the private sector’s external debt.

In February 1983, the Bank of Mexico made arrangements to facilitate the settlement of obligations of the Mexican private sector to foreign suppliers outstanding as of December 20, 1982 and due before June 30, 1983. Under these arrangements private sector debtors would deposit the peso equivalent of payments due with FICORCA and obtain a guarantee of conversion into U.S. dollars at the controlled market exchange rate on the date that the deposit was made. If foreign creditors agreed to be paid by the transfer of these deposits to their name, FICORCA would make the foreign exchange available to the creditor according to a specified schedule of payments extending from September 1983 to March 1985. In August 1983, a similar facility was established for the settlement of obligations falling due between July 1 and December 19, 1983, with payments scheduled for March 1984.

A total of US$500 million in private arrears to foreign suppliers without foreign official guarantee were identified under these two schemes; US$200 million in private arrears were settled in 1983, while the remaining balance was settled in the first quarter of 1984.

Also in 1983, FICORCA provided forward exchange to cover the repayment of external obligations of the Mexican private sector guaranteed by official lending agencies abroad, the restructuring of which was then being negotiated. The agreed minutes of the restructuring agreement explicitly incorporated the concept that the authorities would guarantee the transfer of foreign exchange for the repayment of obligations if the debtor paid the peso equivalent of the obligation. About US$1 billion in private debt that received such guarantees was restructured on this basis.

In April 1983 another scheme was announced to facilitate the restructuring of private external debt. The scheme enabled domestic firms that had obligations outstanding as of December 20, 1982, and that had refinanced these obligations at specified minimum terms, to obtain from FICORCA forward cover at special terms for the foreign exchange needed to make the rescheduled service payments. FICORCA would assume only the obligation to deliver the foreign exchange to the domestic borrower on the basis of a repayment schedule agreed between the debtor and creditor; the external obligation would remain with the debtor. The scheme envisaged four alternative procedures for settlement, depending first on whether forward cover applied to principal alone or to principal and interest, and second on whether the debtor used borrowed resources provided by FICORCA.

(1) Foreign exchange cover provided for principal payments only; no borrowed resources. For this option, the minimum maturity of the refinanced loan should be six years, with at least three years’ grace. The Mexican debtor would continue to pay interest directly to the creditor using foreign exchange converted at the controlled market rate. With regard to amortization, the debtor would deposit with FICORCA a peso amount equivalent to the external obligation. This peso amount would be converted at an exchange rate that would be more appreciated than the prevailing rate in the controlled market—the rate being more favorable to the debtor the longer the maturity of the restructured loan. These deposits would not bear interest, and the interest earned on these funds by FICORCA was expected to offset the cost of the exchange rate discount—that is, the interest rate available to FICORCA was expected to exceed the rate of depreciation of the peso in the controlled market.

(2) Foreign exchange cover for principal payments only; the debtor uses resources borrowed from FICORCA. The only difference from option (1) is that in order to place the peso deposit, the debtor would take a loan from FICORCA on which interest would be charged at market rates.

(3) Forward cover for both principal and interest payments; no borrowed resources. For this option, the minimum maturity of the refinanced loan should be eight years, with at least four years’ grace. The debtor would again deposit with FICORCA a peso amount, but this would have to be equivalent to the external obligation converted at the controlled market rate—the preferential rates would not apply—and the deposit would bear interest at the current London interbank offered rate (LIBOR).

(4) Forward cover for both principal and interest payments; debtor uses resources borrowed from FICORCA. This fourth alternative was similar to the third, except that FICORCA would provide the domestic financing for the local currency deposit of the domestic debtor, as in the second alternative.

Under any of these four options, during the period of negotiation with the foreign creditor, the domestic debtor could place a provisional deposit with FICORCA for the equivalent of the principal in pesos at the controlled market exchange rate. These deposits would bear interest at domestic market rates; and the debtor would be compensated, at the time of settlement of the forward cover contract, for any difference between domestic and foreign interest rates in the period between the initial deposit and the settlement of the contract.

The deadline for registering private debt restructuring operations under FICORCA was November 5, 1983. As of that date, US$11.6 billion had been registered; 94 percent of the total was registered under option (4).

In January 1984, a new forward cover scheme was announced for loans contracted by the private sector. In order to have access to forward cover under this facility, the private debtor was required to sell the proceeds of the loan in the controlled exchange market at the prevailing exchange rate. A credit in local currency equivalent to the value of the foreign loan would then be granted by FICORCA, converted at the controlled market exchange rate. No special exchange rates would apply. The scheme was similar to option (4) above. Virtually no operations had been registered under this scheme through mid-1984.

More recently, Mexico and its commercial bank creditors agreed on terms and conditions under which payments on the private debt covered by the FICORCA schemes would be restructured. Without this restructuring, such payments would have exceeded US$2 billion a year after 1987.


Forward Cover for Private Sector Debtors

In 1985, the Private Corporate Sector Foreign Currency Debt Repayment Program was introduced to provide corporate debtors and their foreign creditors with flexible options for arranging repayments and rescheduling, with forward exchange cover provided when required. Applications for entry into the program, which is administered by the Central Bank Foreign Exchange Cover Corporation (CBFEC), had to be submitted between November 1, 1985 and May 1, 1986. To be eligible for the program, debt had to have original maturities falling due between October 17, 1983 and December 31, 1986.

The program offered four options to the parties involved. The third and fourth of these entailed the provision of forward cover by CBFEC; both were predicated on a rescheduling agreement between debtor and creditor. Under the third option, CBFEC would enter into a forward contract with the debtor whereby the debtor would pay CBFEC in peso amounts equivalent to the rescheduled maturities. These peso amounts would be converted at the exchange rate prevailing on the date that the eligible debt was effectively entered into the program, plus quarterly fees equal to the product of the current domestic interest rate and the peso value of the outstanding debt. CBFEC would then deliver the foreign exchange to make the rescheduled principal and interest payments to the creditor. Debt would be considered rescheduled for this third option if the maturity date was extended by at least six months.

The fourth option was designed for corporate debtors in severe financial difficulties. To be eligible for this option, the debtor and creditor would need to agree on a rescheduling over at least seven years, with at least three years’ grace. CBFEC would extend a national peso loan to the borrower equal to the peso equivalent of the debt in question, converted at the exchange rate prevailing on the date that the debt was effectively entered into the program. Subject to CBFEC’s receipt of service payments on this national peso loan, CBFEC would remit the service payments on the foreign loan directly to the creditor on behalf of the borrower. The foreign loan would have been assumed into the restructured debt of the Central Bank. No data for the costs of this program are available.

Central Bank Swaps

Swap arrangements between the Central Bank and commercial banks formed an important instrument of monetary policy in 1982 and 1983, when they were used to defend official reserves, control bank liquidity, and influence the allocation of credit. In early 1983, it was announced that the amount of swaps outstanding would not be allowed to increase from their end-1982 level. This policy was subsequently relaxed, however, and by the end of 1983 outstanding swaps had increased to US$1.5 billion from US$1.4 billion at end-1982—equivalent to more than 4 percent of GNP. Outstanding swaps subsequently declined steadily, and at end-March 1985 stood at US$1.3 billion.

Central Bank losses on swap arrangements and the provision of forward cover have had a significant expansionary impact on reserve money. At the end of 1982, the Central Bank’s accumulated losses on swaps and forward cover were equivalent to about 2 percent of GNP. Over the following two years, as the peso depreciated, the accumulated losses rose sharply to the equivalent of more than 6 percent of GNP. In November 1983 the Central Bank attempted to stem the losses by linking the fee charged for forward cover, which had hitherto been fixed at 15.5 percent, to domestic money market interest rates. In addition, the effect of swap losses on reserve money was almost entirely neutralized from September 1983 onward. Large net sales of Central Bank securities were needed, however, to offset the monetary impact of the losses arising from the Central Bank’s forward exchange operations.

South Africa

Authorized dealers are permitted, subject to certain limitations, to conduct forward exchange operations, including cover for transactions by nonresidents. Although banks have been encouraged to make a forward market outside the Reserve Bank, their dealings are restricted by a number of financial constraints imposed on them (or on their clients) for exchange control, monetary policy, and general banking supervision. In these circumstances, the forward exchange operations of the Reserve Bank have played a major role. The Reserve Bank has provided forward cover facilities, in U.S. dollars only, since 1980. Such cover is given to authorized dealers for maturities not exceeding 12 months at a time in the form of rand-U.S. dollar swap transactions, with a margin based on an interest differential between the U. S. dollar and the rand. Also, up to the end of 1986 the Reserve Bank provided forward cover contracts in U.S. dollars for longer maturities for government and other public sector institutions.

In order to limit the Treasury’s risk from the provision of forward cover, the Bank allocates a quota to each authorized exchange dealer for the maximum amount the dealer can buy from or sell forward to the Bank by means of swaps. Nevertheless, the Bank has usually been left with large imbalances between its forward purchases and sales, and has suffered large losses from the depreciation of the rand. As of March 1986, the cumulative loss from the forward cover facility since its inception at the end of 1980 was some Rs 8 billion—equivalent to about 150 percent of the stock of reserve money. The authorities planned to terminate their forward cover facility for private sector transactions by August 1986, but following the reintroduction of the dual spot exchange market, the withdrawal from the forward market was postponed so that possible disruptive effects on the dual market could be avoided.


Forward exchange contracts are permitted only for trade transactions. There is no limit on the amount of such contracts but the maturity must be between three to six months. The Reserve Bank is prepared to cover forward transactions and quote fixed discount or premium rates for major currencies. At end-March 1987, about 50 percent of the Reserve Bank’s outstanding forward liabilities was denominated in U.S. dollars. Other important currencies of denomination were South African rand, Swiss francs, deutsche mark, and pounds sterling. The Reserve Bank purchases foreign exchange at the spot preferential telex transfer rate quoted to authorized dealers less 0.35 percent for three-month contracts. Thereafter an additional 0.10 percent discount is applied for each month for up to 0.65 percent for a six-month contract. Sales of foreign exchange take place at the spot preferential telex transfer rate plus 0.65 percent for three-month contracts; an additional 0.30 percent premium is applied for each additional month—up to 1.55 percent for six-month contracts. Authorized dealers are expected to quote to their customers their own telex transfer rate (sight rates plus or minus the margins applied by the Reserve Bank of Zimbabwe).

At end-March 1987, outstanding forward liabilities in foreign exchange of the Reserve Bank amounted to about 12 percent of 1986 imports (f.o.b.). With contracts having maturities of three to six months, this implies that roughly one third to one half of the imports were covered by forward contracts. At the same time, outstanding forward claims were only 10 percent of forward liabilities, so that only a fraction of exports is covered by the forward contracts. Despite the fact that forward rates by the Reserve Bank do not reflect relative interest rate differentials between the Zimbabwian dollar and foreign currencies, gross losses in the year April 1, 1985-March 31, 1986 were almost matched by gross profits, with a net loss of about Z$3.4 million.

Market-Determined Arrangements in Developing Countries


Forward exchange operations are permitted in the private sector, with maturities of up to 180 days and at rates agreed by buyers and sellers; such operations must be related to trade transactions, financial loans, or other loans for which direct sale of foreign currency is permitted. In fact, there are no known forward transactions in the official exchange market. However, there is an active market in forward exchange based on the unofficial or “free” spot market. This is thought to be used mainly for trade-related transactions; forward rates for periods up to the end of the following month are published regularly in domestic newspapers.


The commercial banks are permitted to provide exporters with forward exchange facilities, usually for up to 180 days. The banks provide daily forward quotations for foreign currencies, with forward premiums reflecting corresponding interest differentials. The forward exchange market made by the commercial banks is an active one. There is no official exchange cover facility in Brazil. Banks are subject to daily limits on bought and sold positions in foreign exchange.


In order to improve the flexibility and efficiency of the foreign exchange market, the Central Bank authorized the operation of a forward market with effect from January 1, 1986. The regulations permit commercial banks to provide a market for foreign exchange options with maturities of between 15 and 180 days. Contract rates are determined freely, without intervention by the Central Bank. The regulations impose limits on banks’ gross forward purchases, and on their net exposure overall and in individual currencies.


Commercial banks and nonbank financial institutions are free to conclude forward exchange contracts in any currency and at any maturity, with no restriction on the kind of transaction underlying the forward contract. Forward quotations closely follow interest differentials between the rupiah and respective foreign currencies. Data on transactions in the private forward exchange market are not readily available, but the volume of transactions is believed to be smaller than under the swap facility provided by Bank Indonesia, where the forward premiums on foreign exchange have frequently been significantly narrower (see Table 7).


New regulations were issued in November 1984, governing a forward market in foreign exchange that would be operated by commercial banks for certain commercial transactions. Commercial banks are permitted to deal in forward exchange for maturities of between one and six months; the forward rates at which they are prepared to deal are published daily. The banks are permitted to purchase forward exchange representing proceeds from non-traditional exports other than those to be surrendered to the Export Development Fund and services other than tourism. Eligibility to buy forward exchange from the commercial banks is limited to importers eligible to bid for foreign exchange at the spot auction. The commercial banks may secure and maintain foreign currency resources from their head offices or correspondent banks overseas to meet their uncovered or mismatched forward commitments. The uncovered forward commitments of the commercial banks as a whole are subject to an overall limit of US$10 million; there is a corresponding limit of US$30 million on the banks’ net forward commitments, regardless of whether they are covered spot, and corresponding limits for individual banks. The Bank of Jamaica reserves the right to deal in the forward exchange market with the commercial banks only, but its forward commitments are subject to a limit of US$2 million.


Authorized dealers are permitted to enter into forward contracts in major currencies against the Jordanian dinar for specified commercial transactions, provided that they cover such operations abroad. The maturity of the contracts may be up to one year. Each authorized dealer’s forward transactions are subject to quantitative limits. For corporations or projects considered to be of vital national interest, the Central Bank may offer a forward exchange facility for forward exchange cover provided by Jordanian banks.


Authorized dealers may conduct forward exchange transactions among themselves and with nonbank residents. There are no specific restrictions on the terms of forward contracting for interbank transactions, but the maturity of forward contracts between dealers and non-bank customers cannot exceed one year. All forward contracts between authorized dealers and nonbank residents must be related to bona fide commercial transactions, and the contract amount must not exceed the expected receipt or payment on the transaction.

The central bank provides swap arrangements to domestic banking institutions and branches of foreign banks. Branches of foreign banks can enter into swap transactions with the central bank to secure funds for their domestic currency lending. However, it was announced on March 1, 1985 that the use of swap arrangements as a means of local currency funding by the foreign banks would henceforth be scaled down annually. At the same time, the margin requirement on swap transactions with foreign bank branches was reduced from 1 percent to 0.75 percent.


Commercial banks are permitted to deal forward in all currencies other than those of Israel and South Africa at rates determined by the banks themselves. The forward exchange contracts may be for both commercial and financial transactions. Usually forward cover for the commercial banks is provided for up to three months, either through swap facilities with the central bank or through interbank swaps. In the official facility, forward premiums and discounts are roughly equal to those which the commercial banks charge their customers. Exporters of petroleum, rubber, tin, and palm oil, as well as an increasing number of importers have been the main users of the forward market. Most transactions have been against the U.S. dollar, reflecting its predominance in Malaysia’s external trade and financial settlements. Data for the swap margin in the interbank market show that the ringgit was generally quoted at a forward premium vis-á-vis the U.S. dollar between January 1982 and June 1984, reflecting uncovered interest differentials favoring U.S. dollar assets. Reflecting the decline in U.S. interest rates, a forward discount subsequently emerged, and widened in early 1986 partly because of speculative pressure on the ringgit. (See Chart 1 and Table 8.)

Table 8.

Malaysia: Interbank Swap Transactions Against U.S. Dollars, 1983–871

(In percent per annum)

article image
Source: Data provided by the Malaysian authorities.

Representative three-month swap effected through foreign exchange brokers (end of month).


Forward exchange transactions at market-determined rates are permitted between foreign exchange dealers and their customers. These transactions must be the counterpart of an underlying import or export transaction, and the maturity of the cover must not extend beyond six months.


Singapore has one of the largest foreign exchange markets in developing countries, including an active forward market. Banks are free to deal spot and forward in all currencies, with no limits on maturities or underlying transactions. Foreign currency futures are traded at the Singapore International Monetary Exchange. Singapore’s role as a regional financial center has been deliberately promoted by government policies, including fiscal incentives in the late 1970s and the liberalization of exchange controls, which culminated in the lifting of capital controls in 1978.

The forward exchange market is a private market functioning in a similar way to the forward markets in financial centers in industrial countries. Because there are no impediments to capital movements, forward premiums reflect interest differentials (see Chart 1 and Table 9). A recent econometric study using weekly and monthly data for the period 1976–83 rejected the hypothesis that the forward rate for the Singapore dollar vis-á-vis the U.S. dollar was an unbiased predictor of the spot rate (Tse, 1986). This rejection of the “efficient markets” hypothesis, as in other currency markets, may be a reflection of the exchange risks involved in speculative cross-currency portfolio management.

Table 9.

Singapore: Interbank Swap Transactions Against U.S. Dollars, 1982–871

(In percent per annum)

article image
Sources: Data provided by the Singapore authorities; and International Monetary Fund, International Financial Statistics.

Representative three-month swap effected through foreign exchange brokers (monthly average).

In July 1984, the Singapore Monetary Exchange (SIMEX) began to trade in commodity and financial futures contracts. In August 1984, the Chicago Mercantile Exchange (COMEX) and SIMEX established a link enabling them to trade on a “mutual offset” system in certain financial futures contracts. Initially Eurodollar and U.S. dollar/deutsche mark contracts were traded; U.S. dollar/ yen contracts were subsequently added.

Sri Lanka

The commercial banks provide a forward exchange market for commercial transactions in which rates are freely determined, although the market is highly regulated. The Central Bank of Sri Lanka provides forward cover to commercial banks in U.S. dollars for their sales and purchases of foreign exchange; the period for such cover is up to three months. Previously, the Central Bank provided forward cover at fixed discount/premium rates, irrespective of interest differentials. However, to encourage trading and money market development in general, changes were recently made to forward market operations. Since February 1987, the Central Bank has begun to quote buying rates that take into account interest differentials. At the same time, the Central Bank ceased the forward selling of foreign exchange, except for intervention purposes. Commercial banks now set rates on forward foreign exchange sales among themselves, on the basis of supply and demand.

Under present regulations, commercial banks are required to buy forward foreign exchange proceeds from all exporters whenever exports exceed SL Rs 500,000, whether or not exporters avail themselves of the Central Bank’s export refinance facilities. They may cover such purchases by selling forward to their clients (that is, importers and shipping agents) or to other authorized dealers. However, in entering into forward contracts for the sale of foreign currency to importers, the commercial banks are required to ensure that (1) the forward contract is with a resident of Sri Lanka; (2) the transaction relates to a genuine trade contract involving the importation of food and foodstuffs, raw materials, intermediate goods, drugs, pharmaceuticals, books and pamphlets, and specified capital goods and parts thereof; (3) the deal is effected on an outright basis and not initially as a swap—that is, no other future repurchase is involved; and (4) the average contract is for a period not exceeding 180 days. These regulations were intended to discourage speculation against the Sri Lanka rupee, to speed up the repatriation of export proceeds, and to discourage “nonessential” imports.

Before February 1987, the forward quotations of the Central Bank were changed infrequently and did not reflect international interest differentials. Thus at end-1986, the Central Bank’s buying rate for one-month forward dollars was the same as the spot middle rate, while its selling rate for one-month forward dollars represented a forward premium of 1.4 percent per annum over its spot selling rate. Meanwhile, its buying and selling rates for three-month forward dollars represented forward premiums on the dollar of 0.04 percent and 2.7 percent per annum, respectively.

Prior to that, the rules governing the market were modified in 1984. In order to discourage speculation against the rupee and to expedite the repatriation of export proceeds, the Central Bank stipulated that all export proceeds exceeding SL Rs 500,000 (roughly US$20,000 at the average exchange rate prevailing in 1984) should be sold forward, and that the maturity of the forward contract should be no longer than six months. On the import side, the commercial banks were allowed to sell forward exchange only for essential imports and only for maturities not exceeding six months. All forward contracts were to be conducted through the banking system at freely determined rates.


In recent years, a forward exchange market has developed among the commercial banks, encouraged by the liberalization of the financial sector and a reduction in exchange controls. All forward transactions have to be related to underlying trade transactions, and the maturity of forward contracts is not permitted to exceed six months. The Bank of Thailand introduced restrictions on the open foreign exchange positions of commercial banks in 1984. The forward premium in the baht/U.S. dollar rate, which is freely determined, has closely reflected interest differentials between the two currencies.

In July 1985, a Thai baht option system was introduced, permitting importers to acquire the right to purchase U.S. dollars (from a minimum of $100,000) forward within a six-month period and, by special arrangement, within nine months. The introduction of a corresponding option system for exporters is planned, as is the introduction of options in currencies other than U.S. dollars. Also in July 1985, a private bank introduced option deals between the major foreign currencies up to six months forward.

United Arab Emirates

Commercial banks are free to enter into foreign exchange transactions, including forward contracts related to commercial and financial transactions, at rates of their own choosing. There is a swap facility at the Central Bank, which the commercial banks may use within specified limits to purchase dirhams spot and sell dirhams forward for periods up to three months. Swap facilities are not available to banks having a short position in dirhams except for the covering of forward transactions for commercial purposes.


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International Monetary Fund (1984). A study by the New York Federal Reserve Bank in 1984 concluded, however, that exchange rate uncertainty has had in more recent years a significantly adverse effect on the volume of trade between the United States and the Federal Republic of Germany. See Akhthar and Hilton (1984). This evidence has been challenged by a more recent study for a larger group of countries in Gotur (1985).


General Agreement on Tariffs and Trade (1984).


Keynes (1923), Chapters 3 and 4.


Positions as of end-1986. France, Spain, and Sweden further liberalized their arrangements in 1987.


Antl (1983b), pp. 41–51.


There is an extensive literature on the role of forward market intervention in exchange rate management. See, for example, Day (1976).


Group of Thirty (1980), pp. 33–36.


Maturities fall (with the exception of holidays) on the second Wednesday of March, June, September, and December on the LIFFE and on the IM M in London and Chicago, and on the third Wednesday of March, April, June, July, September, October, and December in the Chicago exchange.


See Fieleke (1985).


The expiration date, which is the last day an option may be exercised, is set as the last Saturday before the settlement date, which is the third Wednesday of March, June, September, and December, respectively, except on the European Option Exchange in Amsterdam, where settlements fall into the months of February, May, August, and November.


For an extensive discussion of options strategies see Bank for International Settlements (1986), Chapter 3.


The available information relating to forward exchange markets in developing countries is limited. The Fund’s Annual Report on Exchange Arrangements and Exchange Restrictions has in recent years contained descriptions of forward practices for an increasing number of developing countries, and further extension of coverage is planned. Expanded and improved data will be included in the edition to be published in August 1988.


International Monetary Fund (1987), pp. 295–6.


Under one of the two major equilibrium conditions for the forward exchange rate, if the actual movement of the spot rate over the period of the contract is greater than the forward premium (expected spot movement at the time of contract) then there is a central bank loss; otherwise there is a central bank profit. For further discussion of the experience with these losses, and their relationship to other macroeconomic policies, see Section IV.


For example, see the empirical tests in Eaker and Grant (1987), pp. 85–105.


For a description of the spot systems, see Quirk, Christensen, Huh, and Sasaki (1987), pp. 5–15.


Statistical tests suggest that the efficiency of the Australian forward market has developed quickly. Although speculative runs have occurred, the forward rate has proved generally an unbiased predictor of spot movements, and runs were connected with a specific episode of sharp depreciation in February 1985, see Tease (1986). Tests of forward market efficiency for other countries (major industrials) have been less conclusive (see Isard (1987), p. 8).


See Warren (1987), pp. 245–72.


Group of Thirty (1985) and Bank of England (1986), pp. 379–82.


Although the South African authorities planned to eliminate the forward cover facility for private sector transactions by August 1986, following the reintroduction of the dual exchange market, the withdrawal of the official forward market has been postponed.


This may also be the most efficient permanent arrangement for a small country.


The sources of the information in these appendices are the Fund’s Annual Report on Exchange Arrangements and Exchange Restrictions, various issues, and material provided by national authorities.


Position as of end-1987.


A further easing of controls occurred on May 21, 1987. At this time, future outlays for direct investments became eligible for forward cover, and the procedures for managing exchange risk were simplified. Companies are no longer required to furnish proof of an underlying transaction before obtaining forward cover, and they may extend or terminate forward contracts as the exchange risk varies.


Japanese financial institutions were permitted to trade in overseas financial futures and options markets as of May 22, 1987.


In September 1987, Spain undertook further deregulation of the forward foreign exchange market.


Position as of end-1987.


The sale of spot U.S. dollars, introduced by the Reserve Bank, became effective on February 2, 1987.