importbacked

Import-backed, also known as import cover, is a financial instrument used to hedge against fluctuations in exchange rates. It involves a financial institution, typically a bank, entering into a forward contract with a client to buy or sell a specified amount of a foreign currency at a predetermined exchange rate on a future date. The institution then uses the proceeds from the contract to purchase the same amount of the foreign currency in the open market, effectively covering the import exposure of the client.

This arrangement allows the client to manage their foreign exchange risk without having to hold the foreign currency itself. The bank, on the other hand, benefits from the interest earned on the funds held in the forward contract. Import-backed is commonly used by multinational corporations, exporters, and importers to protect their revenue streams from adverse currency movements.

The process of import-backed involves several steps. First, the client and the bank agree on the terms of the forward contract, including the currency pair, the amount, and the exchange rate. The client then makes a payment to the bank, which is used to purchase the foreign currency in the open market. The bank then delivers the foreign currency to the client, who can use it to pay for imports.

Import-backed is a popular hedging tool due to its simplicity and effectiveness. However, it is important to note that the bank assumes the counterparty risk, as the client may default on the forward contract. To mitigate this risk, banks often require collateral from the client.