In Non-Deliverable Forwards (NDF) trading, a cash-settled, short-term forward contract on a thinly traded or non-convertible foreign currency, has no physical settlement. Profit or loss at the time at the settlement date, settled against an agreed fixing rate at maturity.
NDFs are mainly used when there is a need to hedge against a currency that does not have a deliverable market offshore, including Malaysian Ringgit (MYR), Indian Rupee (INR), Indonesia Rupiah (IDR), Taiwan Dollar (TWD), Korean Won (KRW), Chinese Yuan (CNY), Philippine Peso (PHP) and Brazilian Real (BRL).
As such, NDFs provide an offshore mechanism to hedge currencies which were previously considered "unhedgeable"; either due to emerging markets, illiquidity or regulatory constraints.
Benefits Of Trading NDF
- Reduces adverse fluctuations to currency exposure and locks in an exchange rate on the trade date
- Easily implemented for both future foreign payables and receivables
- Reduces adverse fluctuations to currency exposure and locks in an exchange rate as of the trade date
- Easily implemented as a series of forward NDF transactions for recurring FX hedging needs
- Allows allocated cash to be kept in its main operating currency until the time of settlement
- No withholding tax or custody requirements
- No bid/offer spread on maturity as the contracts are normally settled against a fixing rate
