A non-deliverable forex forward is a non-deliverable forward based on currency.
A non-deliverable forward (NDF) is an outright forward or futures contract where the counterparties settle the difference between the contracted NDF price or rate and the prevailing spot price or rate on an agreed notional amount.
NDFs are also known as forward contracts for differences (FCDs).
NDFs can be based on various assets, and foreign currency and commodities are the most common asset types.
Usage
NDFs based on foreign currency are especially common in jurisdictions where forward FX trading has been outlawed. The reason behind the ban is typically an effort by the government to prevent exchange rate volatility.
The active trading in NDFs developed in the 1990s, when NDF markets sprang up for parts of the world where capital controls prevented currencies from being delivered offshore.
A main difference between a normal outright forward and the non-deliverable forward is that the settlement for an NDF is normally done in USD since the counterparty is prevented from settling in the alternative currency of the deal.
Please note: Not all non-convertible currencies have an NDF market. Also, some currencies are convertible for certain market participants and non-convertible for others.
Examples of currencies for which there is an NDF market
These are a few examples of currencies for which non-deliverable forwards are traded:
Asia
- CNY Chinese renminbi
- IDR Indonesian rupiah
- INR Indian rupee
- KRW South Korean won
- KZT Kazakhstani tenge
- MYR Malaysian ringgit
- PHP Philippine peso
- TWD Taiwan dollar
- VND Vietnamese ??ng
Africa
- EGP Egyptian pound
- NGN Nigerian Naira
- UGX Ugandan shilling
South- and Central America
- ARS Argentine peso
- BRL Brazilian real
- CLP Chilean peso
- COP Colombian peso
- CRC Costa Rican colon
- GTQ Guatemalan quetzal
- PEN Peruvian nuevo sol
- SRD Surinamese dollar
- UYU Uruguayan peso
- VEF Venezuelan bolívar
Are fx NDFs exchange-traded?
No, they are only over-the-counter traded.
NDF trading
- Forex NDFs are typically quoted with the USD as the reference currency.
- Most NDFs are cash-settled in USD.
- The more active banks quote NDFs from between 1 month to 1 year. Some will quote up to 2 years upon request.
- The most commonly traded NDF tenors are IMM dates, but odd-dated NDFs are also available. (IMM stands for International Money Market. The IMM dates are the four quarterly dates of each year that are used as the scheduled maturity date for a lot of FX Futures Contracts. It is the third Wednesday of March, June, September, and December, respectively.)
- An estimated 60-80% of the world´s NDF trading is speculative.
Using fx NDFs for synthetic foreign currency loans
One of the uses of an fx NDF is when a borrower wants to repay a lender using a currency that the lender does not want to own.
Example:
- A company wants to borrow USD but wants to repay the loan using EUR. The company borrows USD from the lender, and the repayments will be calculated in USD. Payments are made in EUR, with each payment using the current exchange rate at the time of repayment.
When aggreeing to lend the money, the lender knew that it did not want to own EUR. When lending the USD to the borrower, the lender therefore entered into a non-deliverable forward agreement with another counterpart to match the cash-flow from the EUR repayments.
This is known as a synthetic Euro loan from the borrower´s perspective and a synthetic US dollar loan from the lender´s perspective.
The third-party has an NDF contract with the lender.
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