Information flows between non-deliverable forward NDF and spot markets: Evidence from Korean currency

Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings. Forex trading involves significant risk of loss and is not suitable for all investors. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs. Option contracts are offered by Smart Currency Options Limited (SCOL) on an execution-only basis. This means that you must decide if you wish to obtain such a contract, and SCOL will https://www.xcritical.com/ not offer you advice about these contracts.

Forward and spot exchange rates

We believe that a fully cleared venue for NDFs will open up the opportunity for more participants to access the ndf currency venue. A more diverse range of participants will change the liquidity profile and have a positive impact on the market, benefiting not just our customers but the market as a whole. As part of our venue streamlining initiative, we have launched a new NDF capability on the CLOB. Unlike existing services, all trades executed on the venue are submitted to LCH ForexClear for clearing. With LCH ForexClear acting as the Central Counterparty (CCP), it removes the necessity to have a centralised or bilateral credit model. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools.

Non-Deliverable Forward/Swap Contract (NDF/NDS)

HSBC Innovation Bank Limited does not provide Investment, Legal, Financial, Tax or any other kind of advice. Before entering into any foreign exchange transaction, you should seek advice from an independent Advisor, and only make investment decisions on the basis of your objectives, experience and resources. NDFs, which are traded over the counter (OTC), function like forward contracts for non-convertible currencies, allowing traders to hedge exposure to markets in which they are unable to trade directly in the underlying physical currency. In the intricate landscape of financial instruments, NDFs emerge as a potent tool, offering distinct advantages for investors. They safeguard against currency volatility in markets with non-convertible or restricted currencies and present a streamlined cash-settlement process. For brokerages, integrating NDFs into their asset portfolio can significantly enhance their market positioning.

Covered interest parity and carry trades in emerging markets

There are also active markets using the euro, the Japanese yen and, to a lesser extent, the British pound and the Swiss franc. J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor. Please contact customer services – www.fx-markets.com/static/contact-us to find out more. Achieve unmatched margin, capital and operational efficiencies, and enhanced risk management, across your deliverable and non-deliverable OTC FX. A wide range of NDF/NDS currency pairs are already supported on the Service, typically Asian and South American currency pairs. However, with FSS technically able to support any currency pair that our LPs support, we welcome inquiries about additional pairs.

The interest rate parity theorem: a reinterpretation

On the settlement date, the currency will not be delivered and instead, the difference between the NDF/NDS rate and the fixing rate is cash settled. The fixing rate is determined by the exchange rate displayed on an agreed rate source, on the fixing date, at an agreed time. The fixing date is the date at which the difference between the prevailing spot market rate and the agreed-upon rate is calculated. NDFs hedge against currency risks in markets with non-convertible or restricted currencies, settling rate differences in cash. A non-deliverable forward (NDF) is usually executed offshore, meaning outside the home market of the illiquid or untraded currency. For example, if a country’s currency is restricted from moving offshore, it won’t be possible to settle the transaction in that currency with someone outside the restricted country.

The economic value of fundamental and technical information in emerging currency markets

Non-deliverable forwards (NDFs) are forward contracts that let you trade currencies that are not freely available in the spot market. They are popular for emerging market currencies, such as the Chinese yuan (CNY), Indian rupee (INR) or Brazilian real (BRL). Unlike regular forward contracts, NDFs do not require the delivery of the underlying currency at maturity. Instead, they are settled in cash based on the difference between the agreed NDF and spot rates. This article delves into the intricacies of NDFs, their benefits and risks and how they affect global currency markets.

Arbitrage in the foreign exchange market: turning on the microscope

SCOL shall not be responsible for any loss arising from entering into an option contract based on this material. SCOL makes every reasonable effort to ensure that this information is accurate and complete but assumes no responsibility for and gives no warranty with regard to the same. This is useful when dealing with non-convertible currencies or currencies with trading restrictions.

• A deliverable forward (DF) is a forward contract involving the actual delivery of the underlying currency at maturity.
• However, the upshot is the same and that is they will not be able to deliver the amount to a forward trade provider in order to complete a forward trade.
• The settlement date is the date by which the payment of the difference is due to the party receiving payment.
• It also helps businesses to conduct trade with emerging markets in the absence of convertible and transferable currency and manage the exchange rate volatility.

A crucial point is that the company in question does not lose money as a result of an unfavourable change to the exchange rate. Non-deliverable forward trades can be thought of as an alternative to a normal currency forward trade. Whereas with a normal currency forward trade an amount of currency on which the deal is based is actually exchanged, this amount is not actually exchanged in an NDF. An agreement that allows you to lock in a rate of exchange for a pre-agreed period of time, similar to a Forward or the far leg of a Swap Contract. 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. The global financial industry is replete with corporations, investors, and traders seeking to hedge exposure to illiquid or restricted currencies.

The forward premium puzzle: different tales from developed and emerging economies

A non-deliverable forward is a foreign exchange derivatives contract whereby two parties agree to exchange cash at a given spot rate on a future date. The contract is settled in a widely traded currency, such as the US dollar, rather than the original currency. NDFs are primarily used for hedging or speculating in currencies with trade restrictions, such as China’s yuan or India’s rupee. A fundamental question often asked in finance is whether the same asset trading in two different markets sells at the same price at each point in time. In a perfect market, where currency forward and spot prices simultaneously reflect the same aggregate information, price discrepancies would be instantly arbitraged away.

While the USD dominates the NDF trading field, other currencies play an important role as well. The British pound and Swiss franc are also utilised on the NDF market, albeit to a lesser extent. Effectively, the borrower has a synthetic euro loan; the lender has a synthetic dollar loan; and the counterparty has an NDF contract with the lender. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism.

This streamlined approach mitigates client settlement risks and accelerates the entire process, guaranteeing efficiency and confidence in their transactions. An essential feature of NDFs is their implementation outside the native market of a currency that is not readily traded or illiquid. For example, if a particular currency cannot be transferred abroad due to restrictions, direct settlement in that currency with an external party becomes impossible. In such instances, the parties involved in the NDF will convert the gains or losses of the contract into a freely traded currency to facilitate the settlement process.

The notional amount, representing the face value, isn’t physically exchanged. Instead, the only monetary transaction involves the difference between the prevailing spot rate and the rate initially agreed upon in the NDF contract. Much like a Forward Contract, a Non-Deliverable Forward lets you lock in an exchange rate for a period of time. However, instead of delivering the currency at the end of the contract, the difference between the NDF rate and the fixing rate is settled in cash between the two parties. The fixing date is the date at which the difference between the prevailing spot market rate and the agreed-upon rate is calculated.

Consequently, since NDF is a “non-cash”, off-balance-sheet item and since the principal sums do not move, NDF bears much lower counter-party risk. NDFs are committed short-term instruments; both counterparties are committed and are obliged to honor the deal. Nevertheless, either counterparty can cancel an existing contract by entering into another offsetting deal at the prevailing market rate. If one party agrees to buy Chinese yuan (sell dollars), and the other agrees to buy U.S. dollars (sell yuan), then there is potential for a non-deliverable forward between the two parties. Suppose a US-based company, DEF Corporation, has a business transaction with a Chinese company. One cannot convert Chinese Yuan to dollars, so it makes it difficult for American businesses to settle the transaction.