Non-Deliverable Forward

Non-deliverable forward also known as NDF, is a type of futures contract. According to this contract, if there is any kind of difference between the signed rate of the NDF and existing cost of the particular spot, the two parties involved in the contract decide to settle on a speculative amount.

The non-deliverable forward is widely used in the commodities market and foreign exchange market. At the same time, there are several countries where trading activities related to the forward FX are not allowed.

This is done by the government to check unpredictability of the currency exchange rates. In such countries the non-deliverable forwards exist in the financial markets.

The fixing date and the settlement date are very important for the non-deliverable forward. The fixing date represents that particular day on which the calculation of the difference between the existing exchange rate and the contracted rate is done.

On the other hand, in a non-deliverable forward the settlement date denotes that particular day on which the party is expected to receive the payment that is equal to the difference between the existing and agreed rate.

The time period for a non-deliverable forward is quoted between one month and one year but in some particular cases, these time periods are stretched up to two years. These quotes are offered mainly by the active banks. The US dollar is preferred by the parties as a tool of settlement. The non-deliverable forward is also treated as an instrument to hedge the risk related to the foreign currencies.

Another important feature of the non-deliverable forward is that the investor never gets the speculative amount. On the other hand, the NDFs are treated as an instrument that is designed for short term. Again, the risk factor related to the non-deliverable forward is also quite low than other investment instruments. At the same time, both sides involved in the contract are bound to show respect to the contract.

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Last Updated on : 1st July 2013

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