A Non-Deliverable Forwards (NDF) is a forward contract on an inconvertible currency that cannot be settled by delivery of the underlying. The physical exchange of currency at expiry is replaced by settlement between counterparties based on the net difference between the exchange rate listed in the contract and the fixing rate. One party pays the other that difference in USD.

A NDF is used when the client needs to hedge against a currency that does not have a deliverable market offshore, including Indian Rupee (INR), Taiwan Dollar (TWD), Korean Won (KRW), Chinese Yuan (CNY), Brazilian Real (BRL), and Argentinean Pesos (ARS).  Multinational corporations sometimes use non-deliverable forwards to hedge against risk associated with comparatively illiquid currencies, non-convertible currencies.  Hence NDFs provide an offshore mechanism to hedge currencies which were previously considered "unhedgeable"; either due to emerging markets, illiquidity or regulatory constraints.

Benefits of NDF Trading

• Efficient method of managing FX exposures for non-convertible currencies since there is no actual

  exchange of principal funds.
• Easily implemented for both future foreign payables and receivables.
• Reduces adverse fluctuations to currency exposure and locks in an exchange rate as of trade date.
• Easily implemented as a series of forward NDF transactions for recurring FX hedging needs.
• Allows a client to keep allocated cash in its main operating currency until the time of settlement.
• The contracts are devoid of country or local market risk as NDFs are not conditional upon the FX  

  regime being maintained (apart from the fixing at maturity).
• No withholding tax or custody requirements, unlike securities trading.
• No bid/offer spread on maturity as the contracts are normally settled against a fixing rate