In contrast, Malaysia enforced regulation to limit MYR NDF trading and took measures to deepen onshore FX markets. China is following yet another path with the offshore deliverable CNH market. Different policy approaches reflect country specific circumstances and preferences. Policymakers have to make tradeoffs involving many different aspects including control, market depth, spillovers, attractiveness to nonresident investors, real economy impacts and prudential considerations.

In crisis episodes, convertibility risk11 can be a consideration in favor of NDFs. The Russian ruble was made fully convertible in 2006, yet an active NDF market with a daily turnover of USD5.5 bn still exists as of 2019. A factor for the continued relevance of the ruble NDF market could be credit and legal concerns related to the enforceability of collateral arrangements and sanctions (McCauley and Shu 2016).

Valuation and Pricing of NDFs

DNDF transactions have largely moved in tandem with the rupiah exchange rate, rising when the rupiah is under depreciation pressure. Turning to the coefficients on the lagged independent variables, we first analyze the direction of influence between onshore prices at the local market closing time and NDFs at the New York close. Two-way influences between NDFs and onshore FX are present for INR (spot and forward), MYR (spot), and TWD (forward). McCauley, Shu, and Ma (2014), McCauley and Shu (2016) and Reserve Bank of India (2019) provide comprehensive overviews of NDF markets. Recent spillover studies include McCauley, Shu, and Ma (2014) for major currencies and Reserve Bank of India (2019) for INR.

This streamlined approach mitigates client settlement risks and accelerates the entire process, guaranteeing efficiency and confidence in their transactions. We estimate that outstanding DNDFs auctioned by BI were in the range of USD1 to 4 bn prior to COVID-19. Starting in February 2020 when Indonesia experienced large portfolio outflows and IDR depreciation pressures, BI increased sales of DNDFs to close to USD 8 bn (Figure 16). This compares to net portfolio outflows of USD 2.4 bn in February and USD 7.9 bn in March.

Market Participants

For most emerging market currencies NDF markets are likely to continue to flourish as long as full convertibility is not established. Although DNDFs do not count against central banks’ foreign exchange reserves, large short USD DNDF positions can be risky for the central bank. If counterparties choose to not roll over DNDF positions at maturity and instead demand USD in the spot or deliverable forward market, depreciation pressures can be exacerbated. For banks, investors, and corporates, DNDFs may not be perfect substitutes for deliverable instruments or NDFs.

This allows them to profit from currency fluctuations without the need for physical delivery of the currency. NDFs are a complex financial instrument and should only be used by experienced investors. They carry a high degree of risk and can lead to losses if the underlying currency does not perform as expected. The largest NDF markets are in the Chinese yuan, Indian rupee, South Korean won, New Taiwan dollar, Brazilian real, and Russian ruble.

How are NDFs (non-deliverable forwards) priced

Indonesia introduced a domestic version of NDFs (DNDFs), settled in local currency, as an alternative to USD-settled offshore NDFs. Section III surveys the range of policy approaches to NDF markets in Asia and section VI discusses DNDFs. Policymakers pay close attention to NDF markets recognizing potential implications for financial stability and onshore financial markets. The wide spectrum of policy approaches to NDFs across Asia highlights policy tradeoffs.

NDF prices may also bypass consideration of interest rate factors and simply be based on the projected spot exchange rate for the contract settlement date. The IDR rate in the DNDF market is fixed by BI using the Jakarta Interbank Spot Dollar Rate daily and has typically been below that in the NDF market. The spread was the widest when the IDR came under depreciation pressure in mid-May and early August 2019 amid the escalation in US-China trade tensions. During the COVID-19 market turbulence the DNDF – NDF spread reached record levels with the NDF market pricing more depreciation (Figure 17).

How NDFs Work

If the rate increased to 7.1, the yuan has decreased in value (U.S. dollar increase), so the party who bought U.S. dollars is owed money. If in one month the rate is 6.9, the yuan has increased in value relative to the U.S. dollar. The borrower could, in theory, enter into NDF contracts directly and borrow in dollars separately and achieve the same result. NDF counterparties, however, may prefer to work with a limited range of entities (such as those with a minimum credit rating). For example, the borrower wants dollars but wants to make repayments in euros.

The volatility and pricing of NDFs relative to onshore FX markets provides insight in the behavior of both markets and the interactions between them. High volatility does not necessarily indicate a more speculative investor base or price overshooting. It would also be consistent with the absence of policy intervention or faster price discovery. Similarly, a comparison of pricing between onshore and offshore markets is not normative, but useful to understand differences in market views and investor sets.

Access to Restricted Currencies

NDFs are settled with cash, meaning the notional amount is never physically exchanged. The only cash that actually switches hands is the difference between the prevailing spot rate and the rate agreed upon in the NDF contract. The basis of the fixing varies from currency to currency, but can be either an official exchange rate set by the country’s central bank or other authority, or an average of interbank prices at a specified time.

• Lastly, NDFs offer a chance to speculate on where a currency might go in the future.
• For the New Taiwan dollar there have been more deviations, often with NDF markets pricing more appreciation than onshore markets.
• Deutsche Bank will pay BASF this settlement amount in EUR based on the NDF-spot differential.
• Bank of England NDF volume data for London, the world’s largest NDF trading hub, is broadly in line with BIS data (Figure 3).

A rejection of the null hypothesis in one direction implies a one-way spillover. Results on spillovers between NDFs and onshore markets in the literature are mixed and most studies are dated. For currencies with the largest NDF markets, McCauley, Shu, & Ma (2014) find two-way spillovers in normal times and one-directional effects from NDFs to onshore markets in crisis periods.

Understanding Forex NDF Contracts: A Comprehensive Guide

The more active banks quote NDFs from between one month to one year, although some would quote up to two years upon request. The most commonly traded NDF tenors are IMM dates, but banks also offer odd-dated NDFs. NDFs are typically quoted with the USD as the reference What Are The 4 Types Of Crm currency, and the settlement amount is also in USD. Our list of non-deliverable currencies in 2024 is essential for providing a comprehensive understanding of current currency restrictions and their implications for international trade and financial transactions.

What are NDFs? Overview Of Non-Deliverable Forward And Its Functionality

A non-deliverable forward (NDF) is a cash-settled, and usually short-term, forward contract. The notional amount is never exchanged, hence the name “non-deliverable.” Two parties agree to take opposite sides of a transaction for a set amount of money—at a contracted rate, in the case of a currency NDF. This means that counterparties settle the difference between contracted NDF price and the prevailing spot price.