Non-Deliverable Forward
Also known as: NDF
A forward for currencies you can't take home — settled in dollars against an official fixing.
- Asset class
- Foreign exchange
- Instrument type
- Cash-settled forward
- Traded
- OTC
- Typical users
- EM investors, corporates, macro funds
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.
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).
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:
\(\kappa\) 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.