Non-Deliverable Forwards (NDF): Meaning and Uses
Why in the news
A treasury head noted that the NDF market opened the rupee near 88, but RBI stepped in and the rupee rose to 87.41 before easing to 87.60. He estimated RBI sold $1-2 billion.
Key facts
- NDF: a contract for speculating or hedging exchange rate moves where the currency is restricted.
- Short-term deals fixing a future exchange rate.
- Cash settlement: no currency changes hands; the gap between the contract rate and the market rate at maturity is paid by the losing side.
- Mostly priced and settled in US dollars, and traded offshore, outside the home country’s jurisdiction.
Why used
- Firms in countries with capital controls hedge currency risk.
- Investors bet on currency moves without holding the currency.
- A route into markets closed by regulation.
Applications
- Forex: protection against emerging-market volatility.
- Commodities: some NDFs tie payouts to price changes.
Exam angle
- Most traded NDF currencies: CNY, INR, KRW, BRL.
- Settlement currency: US dollar.