Nature of Transactions

Moves and volatility in foreign currency rates emerge as an important risk factor for companies, mainly foreign trade companies that should manage cash flow in foreign currency and for investors who preferred borrowing in foreign currency due to cost advantages. Forward exchange purchase-sale transactions are derivative products developed to manage such risk. In forward exchange purchase-sale transactions, the term, amount and price variables of a foreign currency purchase or sale transaction with delivery at a future date will be set under a contract in the present day. The person or company will thus get protected from unfavorable price variations arising in the future.

Example:
A company to make an import payment of USD 100,000 three months later can, by executing a USD 100,000 foreign currency purchase transaction with a term of three months today, get protected from the exchange rate risk that may arise out of potential upward moves in exchange rates until the payment term.

In forward exchange purchase-sale transactions, the obligation of the parties ends upon occurrence of delivery at the end of the term. However, a reverse transaction (e.g. purchase transaction if the original one was sale, and vice versa) may also close the corresponding position, ending the obligation without waiting for the end of the term.

Example:
A customer who made a USD 100,000 foreign currency purchase contract for three months later can close the corresponding position, ending its obligation through a foreign currency sale transaction in the same amount with the same term before the term of such purchase contract.

Collateral Requirement

In forward exchange purchase-sale transactions, collateral will be received at such percentage over the transaction amount as specified in the contract. If the corresponding limit allocation conditions are met, transaction may also be made without receiving collateral but with a reduction of the limit.

Tax Requirement

Income from forward transactions is subject to withholding in case of individual customers. (In the current practice, no tax is due from corporate customers). The rate of withholding is 10%. Profit or loss amounts will be systematically transferred to the tax base at end of the term, and tax payment will be made quarterly from the final balance then arising in the tax base. If any loss results from the forward transaction and if there exists any previous profit balance in the tax base, then a tax refund will be made after deducting such loss amount from the profit balance in the tax base for the corresponding tax period.