Non-Deliverable Forwards
- simpleisgd
- Feb 4
- 1 min read
Updated: Feb 11
What is a Non-Deliverable Forward (NDF)?
A Non-Deliverable Forward (NDF) is a type of foreign exchange contract typically used for currencies that are not freely traded or face restrictions. Unlike traditional forex contracts, NDFs don’t involve the physical exchange of currencies.
How Do NDFs Work?
In an NDF, two parties agree on a specific exchange rate for a currency pair, but instead of actually exchanging the currencies, they settle the contract in cash. The settlement is based on the difference between the agreed-upon rate and the prevailing market rate at the time of settlement.
Why Are NDFs Used?
NDFs are commonly used for currencies with limited convertibility, such as the Chinese Yuan (CNY) or Indian Rupee (INR). They allow businesses, investors, or traders to hedge against currency fluctuations or speculate on future exchange rates without the need to physically trade the currencies.
Example of an NDF in Action
For example, a company in the U.S. might enter into an NDF contract to exchange USD for Chinese Yuan (CNY) at a rate of 6.50 CNY per USD. On the settlement date, if the market rate is 6.55, the company will receive the difference (6.55 - 6.50) multiplied by the notional amount in cash.
