Non-Deliverable Currencies in 2024: A Comprehensive List

NDF prices may also bypass consideration of interest rate factors and simply be based on the projected spot exchange rate for the contract settlement date. NDFs are also known as forward contracts for differences (FCD).[1] NDFs are prevalent in some countries where forward FX trading has been banned by the government (usually as a means to prevent exchange rate volatility). A non-deliverable swap (NDS) is a variation on a currency swap between major and minor currencies that are restricted or non deliverable forwards not convertible. This means there is no physical delivery of the two currencies involved, unlike a typical currency swap where there is an exchange of currency flows.

What is the difference between forward and NDF?

NDFs are distinct from deliverable forwards in that they trade outside the direct jurisdiction of the authorities of the corresponding currencies and their pricing need not be constrained by domestic interest rates. NDFs allow you to trade currencies that are not available in the spot market, hedge your currency risks and avoid https://www.xcritical.com/ delivery risk. NDFs allow hedging and speculation for currencies with high exchange rate risk or potential returns. They allow market participants to lock in a forward rate or bet on a future rate movement, managing their currency exposure or profiting from their currency views.

How Are NDFs (Non-Deliverable Forwards) Priced?

Banks also structure NDFs flexibly to meet client business requirements in terms of size, dates, and benchmarks. This market is overseen by the Commodity Futures Trading Commission (CFTC). It was given the authority to regulate the swap market under the  Dodd-Frank Wall Street Reform and Consumer Protection Act.

Understand NDFs to Navigate Forex

For instance, if the agreed rate was ₹70 to $1 and the rate at the contract’s maturity is ₹75 to $1, the company would receive a payment based on the difference in these rates, settled in dollars. This transaction allows the company to hedge against its rupee exposure without handling the actual currency. Conversely, if the rupee appreciates, the company would have to pay the difference, demonstrating the risk inherent in such contracts. The NDF market will continue to grow faster than the foreign exchange market as long as authorities try to insulate their domestic financial systems from global market developments, albeit at the cost of lower liquidity. When NDFs serve as a main adjustment valve for non-resident investors in local assets and local firms with dollar debt, they can lead domestic markets.

Access to Restricted Currencies

Our list of non-deliverable currencies in 2024 is essential for providing a comprehensive understanding of current currency restrictions and their implications for international trade and financial transactions. An example of an NDF could be a U.S. company entering into a contract to sell Indian rupees and buy U.S. dollars six months from now at a predetermined rate. The company might do this, expecting the rupee to depreciate against the dollar. 2 Note, however, that the Triennial Survey allocates trading by the location of the sales desk, while the London survey does so by the location of the trading desk.

AU Small Finance Bank Fundamental Analysis

Non-deliverable forwards (NDFs) are forward contracts that let you trade currencies that are not freely available in the spot market. They are popular for emerging market currencies, such as the Chinese yuan (CNY), Indian rupee (INR) or Brazilian real (BRL). Unlike regular forward contracts, NDFs do not require the delivery of the underlying currency at maturity. Instead, they are settled in cash based on the difference between the agreed NDF and spot rates.

• For the separately identified NDFs, however, dollar NDFs represent three quarters of all dollar forwards in the six currencies detailed by the survey.
• In India, the sense that NDF activity strongly affected the domestic market in August 2013 has led to discussion of how to bring NDF trading into the domestic market (see below).
• Note that we lag the VIX for the Asian currencies, using the previous day’s New York close.
• Another good thing about forward contracts is that it operates under non-standardized terms.
• Data made available through mandatory disclosure have made it possible to study NDF market dynamics at a high frequency.
• The spot rate at maturity is taken as the officially announced domestic rate or a market-determined rate.

Stop overpaying with your bank on foreign exchange

Deutsche Bank will pay BASF this settlement amount in EUR based on the NDF-spot differential. BASF enters a 90-day MXN/EUR NDF contract with Deutsche Bank to sell 300 million MXN at an NDF rate of 21 MXN per EUR. The opaque OTC nature of NDF markets makes entering and exiting large positions more challenging. Corporations can fine tune their hedging needs via tailored NDF contracts, unlike standardized futures contracts.

An NDF settles with a single cash flow based on the difference between the contracted NDF rate and the spot rate, while an FX swap settles with two cash flows based on exchanging two currencies at a spot rate and a forward rate. A deliverable forward (DF) is a forward contract involving the actual delivery of the underlying currency at maturity. A DF is usually used for currencies that are freely convertible and traded in the spot market, such as the euro (EUR), British pound (GBP) or Japanese yen (JPY). In normal practice, one can trade NDFs without any physical exchange of currency in a decentralized market. OTC market provides certain advantages to traders like negotiation and customization of terms contained in NDF contracts like settlement method, notional amount, currency pair, and maturity date. 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.

What Is a Non-Deliverable Forward Contract?

Summing CNH forwards, CNH spot and renminbi NDFs, on the grounds that any one of them transforms currency exposure, NDFs were still 45% of such offshore trading. London data for October 2013 show that this share fell by 10 percentage points over the previous six months. If foreign investors use NDFs to hedge exposures in local assets in times of stress, sales of these assets in the balance of payment statistics capture their behaviour only very partially. Analysts need not only to follow the money, ie measure capital flows, but also to follow the risk, and newly available data on NDFs can help (Caruana (2013)).

Following Bech and Sobrun (2013), we examine partial data since April 2013, which raise the question of how much the growth through April reflected a search for yield. If in one month the rate is 6.9, the yuan has increased in value relative to the U.S. dollar. The largest NDF markets are in the Chinese yuan, Indian rupee, South Korean won, Taiwan dollar, and Brazilian real. Trading Derivatives carries a high level of risk to your capital and you should only trade with money you can afford to lose. Trading Derivatives may not be suitable for all investors, so please ensure that you fully understand the risks involved and seek independent advice if necessary.Please read the complete Risk Disclosure. In addition to market-driven factors, the counterparty credit risk is also factored into NDF pricing by dealers.

On this evidence, it appears that, even though the CNY NDF turnover is fading, renminbi developments are boosting Asian NDFs. Table 6 shows that both deliverable forwards and NDFs generally respond to global factors. Following Cairns et al (2007), we supplement the (Haldane and Hall / Frankel and Wei) regression of a given currency on the major currencies with an indicator of global risk – the VIX.

TWD NDF trading surged even more on 11 August, to 486% of the previous day’s volume, or an estimated 3.7 times the April volume. While KRW NDF turnover only doubled, its increase of $10 billion was the largest response of the five currencies. In terms of volume, the responses of the INR and BRL NDFs were the smallest. Similar increases in NDF trading occurred during a bout of CNY turbulence in January 2016.

Settlement was seamless in a convertible currency without executing FX trades or transfers. NDFs for longer tenors will have wider differentials between the contract rate and spot rate compared to short-term NDFs. Even when QSL status is represented, withholding agents may still apply withholding on the payment, making credit forward a useful tool for all withholding agents, including QSLs. Presumably, with the loss of the credit forward system, QSLs may still claim a credit for withholding applied upstream but will need to wait for the refund following the processing of their Form 1042. In almost all jurisdictions, central clearing of NDFs, though not legally mandated, is being encouraged by higher margins for non-cleared NDFs.

The CNH is becoming more attractive to those seeking to hedge because it tracks the onshore rate better than the NDF. The Russian authorities made the rouble fully convertible in mid-2006 amid current account surpluses, large foreign exchange reserves and ambitions for its international use. Its deliverable and non-deliverable markets persist in parallel even as arbitrage joins them and markets deepen. The Chinese renminbi’s recent internationalisation follows neither path and the offshore deliverable renminbi is outcompeting the NDF. 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. Moreover, they do not require the underlying currency of the NDF in physical form.

Consequently, the transaction based on NDF tends to be affordable and cost-effective compared to other forward contracts. In addition, an NDF has the characteristics of getting custom contract terms as per the needs of parties involved, like settlement date, reference exchange rate, and notional amount. NDFs are primarily traded in over-the-counter markets between authorized financial institutions and large corporations. They are usually not traded on exchanges due to the non-standard nature of the contracts and the need for credit relationships between the counterparties.

The profit or loss is calculated on the notional amount of the agreement by taking the difference between the agreed-upon rate and the spot rate at the time of settlement. Divergent trends in NDF trading among the six emerging market economy (EME) currencies identified in the Triennial highlight three distinct paths of FX market development. In a path exemplified by the Korean won (KRW), NDFs gained in importance in a policy regime with restrictions on offshore deliverability. In a second, represented by the liberalised rouble, the NDF maintained its minor role amid financial sanctions and policy uncertainty. China has taken a unique, third path of currency internationalisation within capital controls. For the renminbi, deliverable forwards (DFs) have been displacing NDFs offshore.

NDFs are typically quoted with the USD as the reference currency, and the settlement amount is also in USD. NDFs traded offshore may not be subjected to the same regulations as onshore currency trading. Since there is no principal exchanged, the holder of an NDF contract is reliant on the credit quality and financial standing of the counterparty bank or dealer to fulfill their payment obligations.

When used prudently, NDFs can be an effective tool for risk management as well as for speculative trading strategies. That said, non-deliverable forwards are not limited to illiquid markets or currencies. They can be used by parties looking to hedge or expose themselves to a particular asset, but who are not interested in delivering or receiving the underlying product. A key point to note here is that because this is a non-deliverable swap, settlements between the counterparties are made in U.S. dollars, and not in Argentine pesos. So far, you understand how non-deliverable forward contracts work and how investors can benefit from them.

They can then pay each other the profits/losses in that freely traded currency. Non-deliverable swaps are used by multi-national corporations to mitigate the risk that they may not be allowed to repatriate profits because of currency controls. They also use NDSs to hedge the risk of abrupt devaluation or depreciation in a restricted currency with little liquidity, and to avoid the prohibitive cost of exchanging currencies in the local market. Financial institutions in nations with exchange restrictions use NDSs to hedge their foreign currency loan exposure. The corner of the foreign exchange market represented by NDFs also opens a window for assessing the progress of derivatives reforms. Trading of NDFs has begun to shift to centralised platforms, and higher margin requirements for non-cleared derivatives trades implemented in September saw centralised clearing of NDFs jump.