A non-deliverable forward (NDF) is a currency forward that is settled in cash rather than by physically exchanging the two currencies. It is used for restricted or non-convertible currencies where delivery is blocked or impractical. The two parties never exchange the underlying amounts; instead, one pays the other the difference between an agreed contract rate and a later fixing rate, usually settled in US dollars.
How Does an NDF Work?
At trade time, the parties fix a contract rate for a notional amount and a maturity. On the fixing date, an official or market reference rate for the restricted currency is taken, and the cash settlement equals the contract rate minus the fixing rate, multiplied by the notional.
That settlement is paid in the convertible currency — typically USD. So if you contract USD/INR at a fixed rate for a notional and the fixing later differs, only the net difference changes hands, in dollars.
Why Do NDFs Exist?
Some emerging-market currencies face capital controls or convertibility limits that make physical delivery difficult or impossible. NDFs let businesses hedge genuine commercial exposure to those currencies without needing to move the restricted currency itself.
They are commonly used for currencies such as the Korean won, Indian rupee, and Brazilian real, and have grown to be a meaningful share of overall FX forward turnover.
NDF vs. Deliverable Forward
A deliverable forward ends with the full exchange of both currencies on the value date. An NDF ends with a single net cash payment in the convertible currency, based on the gap between the contract rate and the fixing — no exchange of the restricted currency takes place.
Related Terms: Outright Forward, Spot Rate, Fixing, Convertibility, Emerging Market Currency. See the full glossary for more.
This is educational content, not financial or trading advice.