What Is a Non-Deliverable Forward (NDF)? Structure and Key Currencies

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A non-deliverable forward (NDF) is a cash-settled currency forward. Two parties agree on an exchange rate for a future date, and at maturity they exchange only the difference between that agreed rate and the market rate, paid in a freely convertible currency, usually the U.S. dollar. The underlying currencies never change hands. NDFs exist mainly for currencies that cannot be freely traded or moved offshore because of capital controls or thin liquidity, such as the Chinese yuan, Indian rupee and Brazilian real.

How a Non-Deliverable Forward Works

An NDF is a bilateral contract. One party takes the position of buying the restricted currency (and selling dollars) forward; the other takes the opposite side. They agree on:

• Currency pair, for example USD/INR or USD/KRW.
• Notional amount, the face value used to calculate the payment. It is never exchanged.
• NDF rate, the forward rate agreed at the start.
• Fixing date, when the reference spot rate is observed and the settlement amount is calculated.
• Fixing source, the published reference rate named in the contract that determines the market rate on the fixing date.
• Settlement date, when the net payment is made, shortly after the fixing date.
• Settlement currency, almost always the U.S. dollar, though contracts also settle in euros, Japanese yen and, less often, British pounds or Swiss francs.

On the fixing date, the reference rate is compared with the NDF rate. Whoever the move favored receives the difference; the other party pays it. If the two rates are identical, nothing changes hands.

The reason for this structure is legal and practical. An NDF is usually executed outside the currency’s home market. If a country restricts its currency from leaving the country, an offshore bank cannot deliver it, so the contract converts all gains and losses into a currency that can move freely. In mechanics, NDF settlement resembles a forward rate agreement more than a traditional forward: both settle a rate difference on a notional amount rather than exchanging principal.

The settlement formula

The general relationship is:

Settlement amount = (NDF rate - Fixing rate) × Notional amount

The sign tells you who pays. That basic version needs one adjustment in practice. When the rate is quoted as units of local currency per U.S. dollar (USD/INR, for instance) and the notional is in dollars, the raw difference comes out in the local currency. Because the local currency cannot be delivered, that amount is converted into dollars at the fixing rate:

USD settlement = (Fixing rate - NDF rate) × USD notional ÷ Fixing rate

Written this way, a positive result is a gain for the party that bought dollars forward (sold the local currency), and a negative result is a gain for the party that bought the local currency.

Interpreting the NDF rate

Like any forward rate, an NDF rate is not a forecast. For freely traded currencies, forward rates are tied to the spot rate and the interest rate differential between the two currencies, because traders can arbitrage any gap. With restricted currencies, offshore participants often cannot borrow or lend the local currency onshore, so that arbitrage link is weak. The NDF rate then also reflects offshore supply and demand and expectations about the currency, and it can drift away from the onshore forward rate for the same date. That gap is one of the things analysts watch to gauge offshore sentiment toward a currency.

Example of a Non-Deliverable Forward

Hypothetical example; rates are chosen for illustration only.

A U.S. company expects to receive Indian rupees from a subsidiary in one month and wants protection against the rupee weakening. It enters a one-month NDF with a bank, effectively selling rupees and buying dollars forward:

• Notional: $1,000,000
• NDF rate: 83.00 INR per USD
• Fixing date: one month out; settlement shortly after

Scenario 1: the rupee weakens. The reference rate on the fixing date is 84.00.

• Difference in rupees: (84.00 - 83.00) × 1,000,000 = INR 1,000,000
• Converted at the fixing rate: 1,000,000 ÷ 84.00 = $11,904.76 paid by the bank to the company

The company receives fewer dollars when it converts its actual rupee income at the weaker spot rate, and the NDF payment offsets that shortfall.

Scenario 2: the rupee strengthens. The reference rate is 82.00.

• Difference in rupees: (82.00 - 83.00) × 1,000,000 = -INR 1,000,000
• Converted: 1,000,000 ÷ 82.00 = $12,195.12 paid by the company to the bank

Here the company gives up the benefit of the stronger rupee. Its rupee income buys more dollars at spot, but the NDF payment takes most of that gain away. This is how a forward hedge works: it narrows the range of outcomes in both directions rather than only removing the downside.

Notice that no rupees moved between the two parties at any point. The company still converts its real rupee cash flow in the onshore market at whatever spot rate applies there.

Common Currencies in the NDF Market

The largest NDF markets are in the Chinese yuan, Indian rupee, South Korean won, New Taiwan dollar, Brazilian real and Russian ruble. Other emerging market currencies with capital controls or restricted liquidity, such as the Argentine peso, also trade as NDFs. The yuan has a particular structure: alongside the onshore CNY there is a deliverable offshore yuan (CNH), which is explained further in Yuan vs. Renminbi (RMB).

The common thread is limited convertibility or limited access. NDFs are not restricted to such currencies, though. Any party that wants exposure to an exchange rate without delivering or receiving the currency can use a non-deliverable structure.

Most NDF trading is quoted and settled in U.S. dollars, and the largest share takes place in London, followed by New York, Singapore and Hong Kong.

Who Uses NDFs and Why

• Multinational corporations hedge revenues, costs or investments in countries whose currencies they cannot freely hedge onshore. Locking in a rate stabilizes their home-currency cash flows. For the general logic of offsetting one exposure with another, see what hedging is and how it works.
• Banks and other financial institutions act as counterparties and market makers, provide liquidity, hedge their own currency exposure and execute NDFs for clients.
• Hedge funds and investment firms use NDFs to speculate on emerging market currencies or to hedge the currency risk of local bond and equity holdings.
• Central banks and governments may participate in some cases, as part of managing reserves or responding to pressure on their currency.

The main benefits come from what an NDF avoids. It provides exchange rate protection without holding or converting the restricted currency, and without needing access to the onshore market. It needs only a single net payment at maturity, which keeps settlement simple. And because only the difference changes hands, the amount at stake if a counterparty fails is the net gain on the contract rather than the full notional.

Onshore forward or NDF?

A classic question in hedging exercises asks which instrument a firm should use. Neither is always better. The answer depends on access and on what the firm needs to hedge:

• An onshore deliverable forward settles in the actual currency at the onshore rate, so it matches a firm’s real cash flow and avoids the offshore-onshore gap. It is only an option where local rules allow the firm to deal onshore, and those rules may require documentation of an underlying commercial transaction.
• An NDF is available offshore to parties without onshore access, settles in dollars and involves no transfer of the restricted currency. The trade-off is basis risk: the contract pays off against the reference rate, while the firm’s real conversion happens at whatever rate it gets onshore.

A firm with onshore access and a clear underlying exposure often finds the deliverable forward the closer hedge. A firm without access, or one that only wants to offset the dollar value of an exposure, would use an NDF.

Limitations and Risks of Non-Deliverable Forwards

Market risk. An NDF has a symmetrical payoff. If the rate moves against the position, the loss can be large, and the emerging market currencies that dominate NDF trading can be highly volatile. A speculator has no natural offsetting exposure, so that loss is the whole outcome.

Counterparty risk. NDFs are OTC contracts, and a bilateral trade does not have an exchange clearinghouse guaranteeing it. If the losing party defaults on the settlement date, the winning party may not receive its payment. Net settlement limits the amount at stake, but it does not remove the risk.

Liquidity risk. Some NDF markets have few buyers and sellers. That can mean wider bid-ask spreads, slippage, or difficulty entering or exiting a position, especially in less traded currencies or during periods of stress.

Basis and fixing risk. The payment depends on the contract’s reference rate. If that rate diverges from the onshore rate a company actually uses, or if a disruption affects how the reference rate is published, the hedge will not match the underlying exposure exactly.

No currency delivered. An NDF hedges value, not supply. A company that needs the physical currency to pay a supplier still has to buy it in the spot market.

NDF vs. Similar Instruments

NDF vs. deliverable forward

Both lock in a rate for a future date and are typically OTC. A deliverable forward ends with the full exchange of both currencies at the agreed rate. An NDF ends with one net payment in a convertible currency. For credit risk, the difference matters: a deliverable forward exposes each side to the full principal exchange on settlement day, while an NDF exposes them only to the net amount owed.

NDF vs. currency futures

Futures are standardized, exchange-traded contracts with set sizes and expiry dates, cleared through a clearinghouse and marked to market daily. Losses are settled through margin along the way, and a shortfall can lead to a margin call. NDFs are negotiated privately, so notional, dates and terms can be customized, and gains or losses are typically settled once at maturity, subject to whatever collateral terms the counterparties have agreed.

NDF vs. currency swap

An NDF is a single agreement with one cash-settled payment at maturity. A currency swap exchanges principal amounts in two currencies at the start, swaps interest payments periodically throughout the life of the contract, and re-exchanges the principal at maturity. That makes swaps suited to long-term financing and to managing interest rate differences between currencies, while NDFs serve short-term hedging or speculation in currencies with limited convertibility.

NDF vs. currency option

An NDF obligates both parties: whichever way the rate moves, one of them pays. An option gives the buyer the right but not the obligation to transact, in exchange for an upfront premium, so the buyer’s loss is limited to that premium.

FAQs

The Bottom Line

NDFs matter most to multinational companies, banks and investors with exposure to currencies like the yuan, rupee or real that cannot be freely traded offshore. They lock in an exchange rate without moving the restricted currency, but they carry counterparty, liquidity and basis risk. A firm with onshore access and a real underlying exposure often gets a closer hedge from a deliverable forward.