Cancellation of forward contract

Question

Hi,
Is there possibility of cancellation of a forward contract prior to maturity date. For example I have created a contract for 6 million on 20.03.14 with a tenure of 6 months i.e. end date is 20.09.14 and I want to cancel the contract on 20.06.14. So, how to go by?
Pl reply wat the earliest

Answer 1

Hi,
I would say there are 2 elements in that question:
- business-wise - a question - do you want to cancel this contract completely and the other counterparty agrees with that - I would say this is usually not an acceptable behavior, as FX Forwards are legally binding contracts for both counterparties involved. 
in my view, what looks like a realistic, is that either you:
need liquidity in that currency earlier, than initially planned (like in the example you gave, on 20.06.2014 vs 20.09.2014), so you can simply settle your FWD contract using SWAP contract.
e.g. you bought 6 mio EUR against USD with a value date 20.09.2014, though you need 6 mio EUR on 20.06.2014, so you should engage in FX SWAP, where you Buy 6 mio EUR against USD on 20.06.2014 and simulaneously sell the same 6 mio EUR against USD on 20.09.2014, so on the last date 2 opposite flows will cover each other (with some possible difference due to SWAP points);
also, it might be the case, that due to whatever reason your hedging purpose disappeared, so what you do is you engage in the opposite FX Forward on 20.06.2014, meaning you sell 6 mio EUR against USD with the value date of 20.09.2014. depending on FX rate fluctuations, you might get a Profit or Loss as a result of this.
- system-wise, based on your choice, you need to capture an appropriate deal in the system.
hope this will help you.
Kind regards,
Renatas