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Because NDFs are traded privately, they are part of the over-the-counter (OTC) market. It allows for more flexibility with terms, and because all terms must be agreed upon by both parties, the end result of an NDF is generally favorable to https://www.xcritical.com/ all. This is useful when dealing with non-convertible currencies or currencies with trading restrictions.

Regulatory arbitrage behavior of internationally active banks and global financial market conditions

For those seeking liquidity in NDFs, it’s essential to turn to specialised financial service providers and platforms that fit this niche market. These platforms and providers offer the necessary infrastructure, tools, and expertise to facilitate NDF trading, ensuring that traders and institutions can effectively manage their currency risks in emerging markets. The notional amount, representing the face value, isn’t physically exchanged. Instead, the only monetary transaction involves the difference ndf trade between the prevailing spot rate and the rate initially agreed upon in the NDF contract. The fixing date is the date at which the difference between the prevailing spot market rate and the agreed-upon rate is calculated. All NDF contracts set out the currency pair, notional amount, fixing date, settlement date, and NDF rate, and stipulate that the prevailing spot rate on the fixing date be used to conclude the transaction.

Interbank USD-INR  Non deliverable Forward

On the settlement date, the currency will not be delivered and instead, the difference between the NDF/NDS rate and the fixing rate is cash settled. The fixing rate is determined by the exchange rate displayed on an agreed rate source, on the fixing date, at an agreed time. The fixing date is the date at which the difference between the prevailing spot market rate and the agreed-upon rate is calculated.

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This provides flexibility and convenience in hedging strategies and helps mitigate potential losses due to adverse exchange rate movements. Any changes in exchange rates and interest rates may have an adverse effect on the value, price or structure of these instruments. A non-deliverable forward (NDF) is usually executed offshore, meaning outside the home market of the illiquid or untraded currency. For example, if a country’s currency is restricted from moving offshore, it won’t be possible to settle the transaction in that currency with someone outside the restricted country. However, the two parties can settle the NDF by converting all profits and losses on the contract to a freely traded currency. They can then pay each other the profits/losses in that freely traded currency.

A gateway to deep liquidity in Asian NDF markets

What non-deliverable forwards provide is the opportunity to protect a business (or an investor or individual if needs be) that is exposed to currency risk in a currency for which a normal forward trade is not possible. On the other hand, if the exchange rate has moved favourably, meaning that at the spot rate they receive more than expected, the company will have to pay the excess that they receive to the provider of the NDF. In order to avoid the restrictions imposed by the foreign currency in question, NDF is settled in an alternative currency. Also known as an outright forward contract, a normal forward trade is used to lock the exchange rate for a future date. The global financial industry is replete with corporations, investors, and traders seeking to hedge exposure to illiquid or restricted currencies.

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• The base currency is usually the more liquid and more frequently traded currency (for example, US Dollar or Euros).
• Deviations from covered interest parity, as a risk factor, will remain as long as emerging economies impose currency convertibility restrictions and capital controls.
• The majority of settled forwards include US dollar as the second (basic) currency.
• The past decade has seen rapid growth of foreign exchange trading in emerging market currencies.
• NDFs, by their very nature, are the most valuable to markets where traditional currency trading is restricted or impractical.
• The largest segment of NDF trading takes place in London, with active markets also in New York, Singapore, and Hong Kong.

Much like a Forward Contract, a Non-Deliverable Forward lets you lock in an exchange rate for a period of time. However, instead of delivering the currency at the end of the contract, the difference between the NDF rate and the fixing rate is settled in cash between the two parties. A non-deliverable forward (NDF) is a two-party currency derivatives contract to exchange cash flows between the NDF and prevailing spot rates. The People’s Bank of China controls the level of Renminbi (RMB) and offshore access. NDF specifies a fixed exchange rate on the maturity date, which is normally two working days before settlement, to reflect the spot value.

Access NDF Matching via API or through Workspace

DF and NDF are both financial contracts that allow parties to hedge against currency fluctuations, but they differ fundamentally in their settlement processes. NDFs allow counterparties to conclude currency exchanges in the short term. The settlement date, the agreed-upon date for the monetary settlement, is a crucial part of the NDF contract. The exchange’s financial outcome, whether profit or loss, is anchored to a notional amount. This fictitious sum is the agreed-upon NDF face value between the parties. The bulk of NDF trading is settled in dollars, although it is also possible to trade NDF currencies against other convertible currencies such as euros, sterling, and yen.

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The British pound and Swiss franc are also utilised on the NDF market, albeit to a lesser extent. Forex trading involves significant risk of loss and is not suitable for all investors. Other popular markets are Chilean peso, Columbian peso, Indonesian rupiah, Malaysian ringgit, Philippine peso, and New Taiwan dollar.

Intertemporal risk–return trade-off in foreign exchange rates

The contracts for periods from one month to one year are used the most often. In the intricate landscape of financial instruments, NDFs emerge as a potent tool, offering distinct advantages for investors. They safeguard against currency volatility in markets with non-convertible or restricted currencies and present a streamlined cash-settlement process.

For brokerages, integrating NDFs into their asset portfolio can significantly enhance their market positioning. By offering this specialised instrument, brokerages can reach a broader and more sophisticated client base, boosting their presence in the competitive financial arena and promoting diversification. NDFs, by their very nature, are the most valuable to markets where traditional currency trading is restricted or impractical. This creates a niche yet significant demand, allowing brokers to capitalise on the spread between the NDF and the prevailing spot market rate. With the right risk management strategies, brokers can optimise their profit margins in this segment.

Clients can deal in an OTC manner bilaterally which could be anything from trading a risk price to launching a complex order or transacting on a liquidity provider’s NDF algo suite. Alongside this is the innovative SGX CurrencyNode which is a Recognised Market Operator by the Monetary Authority of Singapore. CFTC which allows BidFX to onboard eligible U.S. market participants who can then seamlessly trade NDFs. With an option trade, a company that is exposed to exchange rate risk can rely on a similar agreement to a forward trade. This is the exchange rate on which the settlement calculation will be based.

Option contracts are offered by Smart Currency Options Limited (SCOL) on an execution-only basis. This means that you must decide if you wish to obtain such a contract, and SCOL will not offer you advice about these contracts.

J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor. In an industry where differentiation can be challenging, offering NDF trading can set a brokerage apart. It showcases the firm’s commitment to providing comprehensive financial solutions and its capability to navigate complex trading environments. While the USD dominates the NDF trading field, other currencies play an important role as well.

FXSpotStream is one of the few services that allows clients fully disclosed NDF and NDS streaming of prices. Clients have the option of accessing both NDF and NDS products via one or both of the execution types available on FSS (Streaming and/or RFS) for standard tenors as well as broken dates with FXSpotStream’s 15 Liquidity Providers. Clients can trade FX NDFs in both Singapore (SG1) and London (LD4) through Euronext Markets Singapore, a Recognised Market Operator (RMO) licensed by the Monetary Authority of Singapore (MAS). Singapore is quickly becoming the hub for Asian trading and the growth of Euronext Markets Singapore NDF volumes are in line with increasing global eFX volumes in the region. Early 2024, we expanded our NDF offering to LD4 and with the option to trade Latin American pairs. FX NDF clients can access diverse pools of both global and local niche liquidity providers with reduced latency.

In contrast, DFs are more suitable for entities that genuinely need the physical delivery of the currency, such as businesses involved in international trade or investments. Interest rates are the most common primary determinant of the pricing for NDFs. This formula is used to estimate equivalent interest rate returns for the two currencies involved over a given time frame, in reference to the spot rate at the time the NDF contract is initiated. Other factors that can be significant in determining the pricing of NDFs include liquidity, counterparty risk, and trading flows between the two countries involved.

An essential feature of NDFs is their implementation outside the native market of a currency that is not readily traded or illiquid. For example, if a particular currency cannot be transferred abroad due to restrictions, direct settlement in that currency with an external party becomes impossible. In such instances, the parties involved in the NDF will convert the gains or losses of the contract into a freely traded currency to facilitate the settlement process. The basis of the fixing varies from currency to currency, but can be either an official exchange rate set by the country’s central bank or other authority, or an average of interbank prices at a specified time. Expectations about future currency movements play a significant role in NDF pricing.