Non-Deliverable ForwardNDF
A non-deliverable forward is a currency forward settled in cash: instead of exchanging the full amounts, the parties pay the difference between the agreed rate and the market rate at maturity. NDFs are common for currencies with capital controls.
A non-deliverable forward lets traders hedge or bet on a currency without ever exchanging it. At maturity, only the gain or loss is paid, usually in US dollars. NDFs are common for currencies with capital controls, and rules on them differ by country.
- Category
- Derivatives
- Reading time
- 4 min
- Also called
- NDF, Cash-settled FX forward, Non-deliverable currency forward
- Updated
NDFs in plain words
An NDF settles only the difference between the contracted rate and the spot rate at maturity, paid once to the side that came out ahead.1
They are currency forwards in which the currencies themselves never change hands.2
That lets traders hedge or speculate on a currency without having to fund themselves in it.1
How an NDF works
Agree the terms
Set the currency pair, notional amount, forward rate and fixing date.
Choose the fixing source
Agree the fixing source — an official domestic rate or a market rate — used at maturity.3
Wait to the fixing date
No currency changes hands in the meantime.
Compare rates
Measure the gap between the agreed forward rate and the fixing.
Settle the difference
Settle in cash, usually in US dollars, paying only the gap between the final spot rate and the agreed forward rate.2
Watch fixing gaps
Watch for basis risk: before China's 2015 fixing reform, the renminbi NDF could settle up to 2% away from where the currency actually traded.1
Worked examples
Example 1 — Buyer gains
≈ $24,390 receivedA hypothetical investor buys a USD/XYZ NDF on $1,000,000 at 80.00 XYZ per dollar. The fixing comes in at 82.00.
| Gap | 82.00 − 80.00 = 2.00 XYZ |
| Gain in XYZ | 2.00 × 1,000,000 = 2,000,000 XYZ |
| Paid in USD | 2,000,000 ÷ 82.00 ≈ $24,390 |
Only the difference changes hands, in a single payment to the side that gained.1
Example 2 — Buyer loses
≈ $12,658 paidSame NDF, but the fixing comes in at 79.00.
| Gap | 79.00 − 80.00 = −1.00 XYZ |
| Loss in USD | 1,000,000 ÷ 79.00 ≈ $12,658 |
The settlement equals the gap between the final spot rate and the agreed rate.2
Example 3 — Hedging receivables
Currency loss offsetA hypothetical exporter will receive XYZ worth $500,000 and sells USD/XYZ NDF protection against XYZ weakness at 80.00. XYZ weakens to 84.00.
| Lost on receivables | ≈ $500,000 × (1 − 80 ÷ 84) ≈ $23,810 |
| NDF payoff | ≈ $23,810 |
| Net | ≈ $0 |
The hedge works without anyone having to hold or move the currency itself.1
NDF vs deliverable forward
| Aspect | NDF | Deliverable forward |
|---|---|---|
| Settlement | Net cash difference, often in USD | Full exchange of both currencies |
| Where it trades | Mostly offshore | Mostly onshore |
| Typical currencies | Restricted or controlled | Freely convertible |
| Fixing risk | Yes, depends on fixing source | Less, actual delivery |
Who uses NDFs
Hedging restricted currencies
Firms manage Exposure where currency delivery is limited.
Investor hedges
Funds holding local bonds use Hedging via NDFs.
Speculation
Traders take a currency view without onshore accounts, adding Counterparty Risk.
Price discovery
NDF prices hint at expected moves versus Spot Trading rates.
Advantages and disadvantages
Advantages
- No need to hold or deliver the restricted currency.
- Small net settlement instead of full amounts.
- Available when onshore markets are limited.
- Settles in a major currency such as USD.
Disadvantages
- Fixing rates can differ from real trading levels.
- Mostly OTC, so counterparty risk applies.
- Liquidity varies by currency.
- Rules differ by country and can change.
Going deeper
Read as far as you need. Each level builds on the one before it.
Why NDFs exist
Beginner
Deliverable forwards and FX swaps mostly trade onshore, while NDFs mostly trade offshore.1 NDFs let offshore traders get exposure where local rules restrict delivery.
The fixing
Intermediate
The final spot rate comes from either an official domestic fixing or a market rate.3 The choice of fixing source sets the final payoff.
Basis between onshore and offshore
Advanced
Before the 2015 renminbi reform, the NDF's settlement rate could differ by up to 2% from the currency's real trading level.1 Gaps like this are a form of basis risk for hedgers.
Common mistakes
Expecting delivery
No currency is exchanged; only the difference is paid.
Ignoring fixing rules
Check which rate and time set the payoff.
Forgetting counterparty risk
NDFs are usually OTC contracts.
Assuming rules are the same everywhere
Local rules on offshore trading vary by country.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- An NDF is a cash-settled currency forward.
- Only the difference between forward and fixing is paid.
- Settlement is usually in US dollars.
- NDFs are common for currencies with capital controls.
- Fixing gaps and counterparty risk are the main risks.
Frequently asked questions
Which currencies trade as NDFs?
Are NDFs regulated?
Can retail traders use NDFs?
Further learning
- Hedging
How NDFs protect currency exposure.
- Counterparty Risk
Risk in OTC contracts.
- Settlement
How cash settlement works.
- Trading Pair
How currency pairs are quoted.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Bank for International Settlements. Non-deliverable forwards: impact of currency internationalisation and derivatives reform (BIS Quarterly Review, December 2016) (opens in a new tab) Checked .
- International Monetary Fund. Offshore Currency Markets: Non-Deliverable Forwards (NDFs) in Asia (IMF Working Paper 2020/179) (opens in a new tab) Checked .
- Bank for International Settlements. Non-deliverable forwards: 2013 and beyond (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.