NDF

Question 1

What is an NDF?

Answer 1

A cash-settled forward contract on a currency where physical delivery of the local (“restricted”) currency is not possible or not practical due to capital controls. Settlement is made in a freely convertible “non-controlled” currency (typically USD).

Question 2

When are NDFs used?

Answer 2

To hedge or speculate on currencies subject to convertibility/capital controls (e.g., ARS, BRL, INR, CNY onshore), or where physical settlement is operationally difficult

Question 3

How is an NDF quoted?

Answer 3

Typically as restricted currency per 1 unit of settlement currency (e.g., BRL/USD = X BRL per USD). Quote conventions can vary by market—always confirm the quotation.

Question 4

What are the key NDF dates?

Answer 4

Trade date → Fixing/valuation date (spot rate is observed from an agreed source) → Settlement date (net cash is exchanged in settlement currency).

Question 5

What is the “fixing rate”?

Answer 5

The reference spot rate on the fixing date from a pre-agreed source (e.g., central bank screen or WM/Refinitiv).

Question 6

What is the notional in an NDF?

Answer 6

A reference amount used to compute the cash settlement; the notional does not exchange.

Question 7

How is the NDF settlement amount determined (general idea)?

Answer 7

It’s the difference between the agreed NDF rate and the fixing spot rate, scaled by notional, and converted (if necessary) into the settlement currency.

Question 8

Why don’t NDF prices strictly obey covered interest rate parity (CIRP)?

Answer 8

Capital controls and segmentation break arbitrage chains; NDF pricing reflects supply/demand and perceived convertibility risk more than interest differentials.

Question 9

Credit risk profile vs. deliverable forwards?

Answer 9

Lower principal exchange risk—only the net cash difference settles. There’s still counterparty credit/settlement risk on the net amount.

Question 10

Liquidity and market depth?

Answer 10

Generally thinner and more segmented than G-10 deliverable forwards; liquidity varies by tenor and currency.

Question 11

Advantages of NDFs (exam points)?

Answer 11

1 Enable hedging where physical delivery is restricted.

2 Cash settlement; operationally simpler, lower principal risk.

3 Tenors are flexible; documentation standardized (ISDA).

4 Often easier access than onshore markets for foreign investors.