Non-Deliverable Forward (NDF)

A non-deliverable forward (NDF) is a foreign exchange contract in which one party agrees to buy a currency at a specified price on a specified date, while the other party agrees to sell the same currency at the same price. However, unlike a regular forward contract, the NDF does not require the exchange of the underlying currency on the settlement date. Instead, the settlement is made in cash, based on the difference between the forward price and the spot price on the settlement date.

NDFs are often used to hedge against currency risk, or to speculate on the future direction of a currency. They are also used by investors to access foreign markets that are not otherwise accessible.

NDFs are typically traded over-the-counter (OTC), and are not subject to the same regulations as exchange-traded derivatives. This can make them more risky than exchange-traded derivatives, as there is no central counterparty to guarantee the performance of the contract.

NDFs are also more complex than regular forward contracts, and can be difficult to understand. This can make them a risky investment for inexperienced traders.

Despite the risks, NDFs can be a useful tool for hedging or speculating on currency movements. However, it is important to understand the risks involved before trading NDFs.

Here are some additional details about NDFs:

• NDFs are typically quoted in terms of the difference between the forward price and the spot price. This difference is called the "swap points."
• The swap points are typically quoted in basis points, which are hundredths of a percentage point.
• The size of the swap points depends on the volatility of the underlying currency.
• NDFs can be used to hedge against currency risk in a variety of ways. For example, a company that imports goods from a foreign country could use an NDF to lock in the exchange rate for the purchase of those goods.
• NDFs can also be used to speculate on the future direction of a currency. For example, a trader who believes that the euro will appreciate against the dollar could buy an NDF to lock in the current exchange rate.
• NDFs are typically traded over-the-counter (OTC), and are not subject to the same regulations as exchange-traded derivatives. This can make them more risky than exchange-traded derivatives, as there is no central counterparty to guarantee the performance of the contract.
• NDFs are also more complex than regular forward contracts, and can be difficult to understand. This can make them a risky investment for inexperienced traders.