Non-Deliverable Forward
Also known as: NDF
A forward for currencies you can't take home — settled in dollars against an official fixing.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat is it, really?
Some currencies — the Indian rupee, Korean won, Brazilian real, Taiwan dollar and others — are restricted: capital controls prevent foreigners from freely trading or delivering them offshore. The market's workaround is the non-deliverable forward.
An NDF works like a normal forward except no restricted currency ever changes hands. At maturity, the agreed rate is compared with an official reference fixing, and the difference is settled in US dollars (or another convertible currency).
Agree to "buy" 100M rupees' worth at 84.00 per dollar; the fixing comes in at 82.00 (rupee stronger)? You receive the dollar value of that gain. It's a pure bet or hedge on the exchange rate, engineered to never touch the controlled currency itself.
Point at a line to pick it out from the others.
only if a condition is metnot a payment
Everything happens in a convertible currency. The restricted one is only ever a number read off a screen.
On the trade date
- The buyer → The seller Plus a notional in the restricted currency, which exists only as a measuring unit.
On the fixing date
- The fixing source → The buyer Whichever source the contract names. If that source stops publishing, the fallback language written years earlier decides what happens.
Two days later
- The seller → The buyer One net payment in the convertible currency. Nothing in the restricted currency ever crosses a border.
- The buyer → The seller The same calculation with the sign reversed.
- Asset class
- Foreign exchange
- Instrument type
- Cash-settled forward
- Traded
- OTC
- Typical users
- EM investors, corporates, macro funds
Which risks decide the outcome
Not how risky this is, and not a rating — there is deliberately no total. It says which of five failure modes drives what happens here, in the same order on all 129 products so they can be compared. This publication's own reading; see the notice below.
- Marketdecides it
- Creditmatters
- Liquiditymatters
- Fundingbarely applies
- Operationaldecides it
What decides it here. Everything settles in a convertible currency and the restricted one never moves. If the named fixing stops being published, the fallback language written years earlier decides the outcome.
3 · IntermediateHow it works in practice
Mechanics
- Fixing: settlement uses a published reference rate (e.g. the RBI reference rate for INR) on the fixing date, typically two days before value date.
- Settlement amount: \(N \times (F_{NDF} - Fix)/Fix\) in USD (convention varies by pair).
- Tenors: 1m–1y liquid; centres in London, Singapore, Hong Kong, New York — deliberately offshore.
Onshore vs. offshore: two prices, one currency
The NDF rate can deviate from the onshore forward because different players with different constraints trade each. The onshore–offshore spread is a live gauge of capital-control pressure: when offshore markets price much weaker currency than onshore, devaluation expectations (or sanctions stress) are building. Watchers of CNY track the CNH/CNY/NDF triangle for exactly this.
Who uses NDFs
- Global investors hedging EM bond/equity exposure without local infrastructure.
- Corporates with revenues trapped in restricted markets.
- Macro funds expressing EM views (NDFs are often the only practical instrument).
4 · AdvancedPricing & valuation
Pricing: parity with a wedge
Where arbitrage between onshore and offshore is possible (limited, by design), NDF points approach onshore CIP; the residual is the convertibility premium:
What the symbols mean
- Fthe forward or futures price
- Nthe normal distribution, or a count
- Dduration: how far a bond's cash flows sit in the future
- Sthe price of the underlying today
- rthe interest rate, per year
- Tmaturity, in years
\(\kappa\) prices controls bindingness, sanction risk and offshore positioning. Backing out implied local yields from NDFs is a standard EM monitor — spikes flag stress before onshore markets can show it.
Fixing risk
Settlement hinges on one print: fixing methodology, local holidays, and manipulation history (several benchmark scandals) make fixing risk a real pricing input. Disruption events (a peg break, market closure, fixing unavailability) trigger fallback provisions — priced implicitly and painfully relevant in crises (Argentina, Russia 2022: RUB NDFs went through contested fallback determinations).
Options and vol
Non-deliverable options (NDOs) settle the same way; EM vol surfaces show extreme skew toward devaluation, and pegged/managed pairs exhibit bimodal densities (small drift vs. break scenario) that Black–Scholes handles poorly — jump/regime models or market-quoted risk reversals carry the information.
Clearing and evolution
NDFs are among the most-cleared FX products (LCH ForexClear) with settlement in CLSNet; as controls liberalise (CNY partially), volume migrates to deliverable markets — the NDF market is, structurally, a measure of the world's remaining capital controls.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow practitioners think about it
Now say it back
Close the page and give Non-Deliverable Forward in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — two parties wanted opposite things badly enough to write it down.
- What the contract obliges, and when — not the payoff; the obligation.
- Where the money comes from — name the source, or you have described a hope.
- What makes it lose — the ordinary way, not the dramatic one.
Put Non-Deliverable Forward beside any other instrument →
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