Joseph William194 Gonzalez

View translation

What are Non-Deliverable Forwards (NDFs) in forex trading?

Non-Deliverable Forwards (NDFs) are forward contracts settled in cash rather than physical delivery of the currency. They are common in restricted markets like CNY, INR, or BRL, where capital controls prevent free convertibility. Example: a US company expecting INR revenues might hedge using a USD/INR NDF. At settlement, only the difference between the agreed forward rate and the actual spot is exchanged in USD. Benefits: firms can hedge exposure without accessing restricted markets. Risks: pricing depends on offshore liquidity, and spreads can be wide during volatility. Institutions use NDFs for risk management, while hedge funds may speculate on central bank policy shifts. Retail traders rarely access NDFs directly but should understand their role, as they influence offshore pricing and forward markets. NDF volumes also act as indicators of global investor sentiment toward emerging market currencies.