FX Forwards and Market Quotes · Forwards Trading Guide

A non deliverable forward settles a currency difference without exchanging the underlying currency principals. Its fixing rules are central to the result.

Separate exposure from delivery

An NDF creates exposure to a currency pair but normally settles in a specified currency such as USD. It does not provide the local currency needed to pay an invoice. The contract identifies the notional, agreed rate, reference fixing, observation date and settlement date. Availability and eligibility depend on the currencies, counterparties and applicable rules.

Work with an explicit convention

Assume a fictional NDF buys USD 100,000 against a local currency at 80 local units per dollar. Under an illustrative USD settlement convention, the long USD payoff is USD notional × (fixing rate minus contract rate) ÷ fixing rate. A fixing of 84 gives approximately $4,761.90 to the long USD party. A fixing of 76 produces a payment of approximately $5,263.16 by that party.

Why the denominator matters

The difference is first an amount in the local currency and is then converted at the agreed fixing convention. Multiplying the rate gap by the USD notional and calling the result dollars would use the wrong units. Other confirmations can express notional and direction differently. Translate the exact legal payout into a worksheet and verify both favourable and adverse examples before using it.

Read the fallback process

The scheduled fixing may be delayed, disrupted or corrected. Contracts can specify alternative sources, postponements or other calculation procedures. A hedge can also retain a gap between the offshore NDF fixing and the rate available for a real local payment. Clearing may be available for some NDFs, but settlement, collateral and access terms must be checked for the particular arrangement.

Try it yourself

Under the example convention, a long USD 50,000 NDF has a contract rate of 90 and a fixing of 100 local units per dollar. What is the settlement?

Show the worked answer

The long USD party receives $5,000, calculated as 50,000 × (100 minus 90) ÷ 100. It still has not received any local currency principal.

Further reading

Educational material. Numerical examples are hypothetical and exclude costs unless stated. Forward contracts create binding obligations and may require collateral or credit approval. Actual terms, access and risks depend on the agreement and jurisdiction.

Continue learning