Non-deliverable Forward (NDF)
Definition
A non-deliverable forward is a forward outright where, instead of settling the outright amounts at maturity, the two parties agree at the outset that they will settle only the change in value between the forward rate dealt and the spot rate two working days before maturity. The economic effect is the same as if a normal forward outright had been dealt and then closed out two days before maturity by an offsetting spot deal.
How is it used?
An NDF is a contract for differences, analogous to a FRA for interest rates.
NDFs are normally used to trade currencies with limited convertibility – i.e. currencies where it is not possible to transact a normal forward outright because the authorities in that country ...
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