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NDF Market

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NON – DELIVERABLE   FORWARD (NDF)
 

NDF market is an offshore market to trade and hedge in currencies of countries wherein there is no full convertibility (both capital account and Current Account). Few of the NDF market traded currencies are Indian Rupee, Chinese Yuan, Philippine Peso, Taiwan Dollar, and Korean Won. NDFs are distinct from deliverable forwards as the NDF s trade outside the countries of the corresponding currencies.


NDF is a Non-Deliverable Forward contract which is settled in cash and only in US Dollars. The difference between the Spot rate and the outright NDF rate is arrived on an agreed notional amount and settled between the two counterparties. To understand this let us see the following example

 

A Diamond trader  Bapulal diamond, on 3 rd January 2011 sells  INR 46 mn NDF to Axis bank, 2 months forward (4th March 2011) at the rate of 46,inturn buying $1 million . Rate fixing date is 3rd March 2011 the counterparties would compare the NDF rate with the USD/INR rate as prescribed by the RBI at 12 noon IST on 3rd March 2011.

 

Scenario 1: 

NDF rate is equal to RBI Reference Rate, no payment needs to be paid by any of the parties to the contract.

 

Scenario 2: 

NDF rate is 46, RBI Reference Rate =48 then the difference of two Rupee on the notional amount of $1 million, which is equivalent to $41,666 [({48-46}*1000000)/48] is to be paid by Bapulal diamond to Axis bank.
 

Scenario 3: 

NDF rate is 50, RBI Reference Rate =45 then the difference of Five Rupee on the notional amount of $1 million, which is equivalent to $111,111 [({50-45}*1000000)/45] would be received by Bapulal diamond from Axis bank.


NDF markets remain a platform for hedging, speculation and arbitrage. The participants in the NDF market comprise MNC’s, commercial and investment banks, hedge funds, exporters and importers. The trading locations for NDF s are in Dubai, Singapore, Hong Kong, Tokyo and London.

 

Traders take position in the INR NDF market based on their view on where the INR spot would be after a certain time period in the onshore market (Indian forex market). Entities who have access to both the markets take advantage of the arbitrage opportunities. Arbitrage opportunity is available occasionally between the offshore INR NDF market and the onshore Indian Rupee market including the Spot market and Futures market, which provides a trading opportunity for the retail investors and the onshore players.

 
 
 
 
 
 
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