A Non-Deliverable Forward (NDF) is a type of forward contract primarily used to trade non-convertible or restricted currencies. Unlike traditional forward contracts where the underlying currencies are physically exchanged at maturity, NDFs are cash-settled. This means that at the contract’s maturity, only the profit or loss, calculated as the difference between the agreed-upon NDF rate and the prevailing spot exchange rate, is exchanged between the two parties. No physical delivery of the notional currency takes place.
Key Characteristics and Functionality of NDFs
NDFs are crucial instruments in foreign exchange (FX) markets, particularly for managing exposure to currencies that face exchange controls or are not freely convertible. Here are their key characteristics.
Over-the-Counter (OTC) Trading – NDFs are traded privately between two parties (typically financial institutions and their clients) in the over-the-counter (OTC) markets. This means they are not traded on organized exchanges, allowing for greater customization of contract terms.
Customizable Contract Terms – The specific terms of an NDF contract are agreed upon by both involved parties. These terms typically include:
Currency Pair – The two currencies involved in the exchange (e.g., USD/CNY, USD/INR).
Notional Amount – The principal amount of the trade, used solely for calculating the cash settlement amount.
NDF Rate – The forward exchange rate agreed upon at the initiation of the contract.
Fixing Date – The date on which the prevailing spot exchange rate (usually from a recognized source like a central bank or a specific market rate) is observed to calculate the settlement amount.
Settlement Date – The date on which the cash settlement (profit or loss) is actually paid.
Cash Settlement – The defining feature of an NDF is its cash settlement mechanism. At the fixing date, the difference between the pre-agreed NDF rate and the official spot rate is calculated. This difference, multiplied by the notional amount, results in a cash payment from one party to the other, typically in a freely convertible currency (like USD or EUR).
Hedging and Speculation – NDFs are widely used by multinational corporations and investors to hedge their exposure to the exchange rate risk of non-convertible currencies without needing to physically exchange those currencies. They are also employed by speculators looking to profit from anticipated movements in restricted currency exchange rates.
Access to Restricted Markets – NDFs provide a vital tool for gaining synthetic exposure to emerging market currencies that have capital controls or are otherwise difficult to trade directly in the spot market. This allows international participants to manage their currency risk or take directional views on these markets.
In summary, Non-Deliverable Forwards (NDFs) are essential derivatives that offer a flexible and efficient way to manage currency risk and gain exposure to non-convertible currencies within the global FX market, all through a cash-settled mechanism.
Start Trading with Orient Futures Singapore
Being an Overseas Intermediary of Shanghai International Energy Exchange (INE), Dalian Commodity Exchange (DCE), and Zhengzhou Commodity Exchange (ZCE), when foreign clients participate in internationalised futures contracts in these Chinese markets with us, they have direct access to trading, clearing, and settlement. Our parent company, Shanghai Orient Futures, is the largest broker in terms of aggregated volume across the five regulated exchanges in China.
Orient Futures Singapore also currently holds memberships at the Singapore Exchange (SGX), Asia Pacific Exchange (APEX), and ICE Futures Singapore (ICE SG). Starting August 2023, corporate clients can also gain access to the B3 Exchange through us, opening additional trading avenues.
Expect streamlined processes and an easy-to-use interface designed for minimal latency, accompanied by our team’s round-the-clock availability on trading days to provide assistance for all your trading needs.
