What Is a Non-Deliverable Forward (NDF)? A Beginner’s Guide

Doing business in emerging markets often means dealing with currencies that are not freely tradable. From the Chinese Yuan to the Indian Rupee or Brazilian Real, exchange restrictions and capital controls can make it difficult to hedge currency exposure using traditional tools like spot contracts or deliverable forwards. That’s where Non-Deliverable Forwards (NDFs) come in.

NDFs are cash-settled contracts that allow businesses to lock in exchange rates without physically exchanging restricted currencies. This guide explains what NDFs are, how they work, and how companies use them to manage FX risk in controlled markets. You’ll get the answers to these questions:

✅ What makes an NDF different from a deliverable forward?

✅ When should businesses use NDFs?

✅ Who are NDFs most useful for?

✅ What are the risks and benefits?

A Non-Deliverable Forward (NDF) is a forward contract in which two parties agree to settle the difference between a pre-agreed NDF rate and the actual market (spot) rate on a set future date. Unlike a deliverable forward, there is no physical delivery of currency; only a cash difference is paid, usually in a hard currency like the US Dollar or Euro.

NDFs are mainly used for currencies that can’t be freely traded due to capital controls or convertibility issues. This includes currencies like the Philippine Peso (PHP), Indian Rupee (INR), Korean Won (KRW), Brazilian Real (BRL), and Chinese Yuan (CNY offshore or CNH).

For businesses dealing with these currencies, NDFs offer a way to hedge future income or expenses without the need to move money in or out of restricted markets. They’re particularly useful when you want to:

• Lock in a forward FX rate without moving physical funds across borders
• Manage currency risks in emerging markets

While both NDFs and deliverable forwards are used to hedge FX risk, they differ significantly in structure and use case.

While deliverable forwards involve actual transfer of currency, NDFs remain popular in NDF markets where certain currencies are non-convertible. This distinction makes them useful tools in global financial markets, especially when physical settlement is not feasible.

NDFs are generally used when currency controls prevent actual delivery, while deliverable forwards suit markets where physical settlement is possible. Here is the breakdown of the key differences:

NDFs are commonly used in NDF trading desks within banks, investment firms, and hedge funds. These instruments allow participants to take positions on restricted currencies without triggering cross-border capital controls. 

NDFs follow a straightforward structure involving three key stages: contract setup, fixing, and settlement.

First, the two parties define the terms of the agreement, which include the following:

• Notional amount: The base value of the contract, usually denominated in the restricted currency (e.g. INR or CNY).
• Forward rate: The agreed-upon exchange rate that will apply on the fixing date.
• Fixing date: The future date when the actual spot exchange rate will be observed for comparison.
• Settlement date: The date when the difference between the forward rate and the spot rate is calculated and paid.

On the fixing date, the reference spot rate is obtained, typically from an official or independent source. This rate is compared to the forward rate agreed in the contract. The difference between the two determines whether one party has a gain or a loss.

On the settlement date, the party who is at a loss pays the net difference to the other party. This payment is made in a hard currency, such as USD or EUR. There is no transfer of the restricted local currency, which makes NDFs especially useful for markets with capital controls. No physical transferring of funds has to be made. 

NDFs are used to hedge currencies that are restricted, non-convertible, or subject to capital controls. These include several major and emerging market currencies across different regions. The commonly traded NDF currencies include: 

• Philippine Peso (PHP)
• Indian Rupee (INR)
• Korean Won (KRW)
• Brazilian Real (BRL)
• Chinese Yuan (CNY offshore or CNH)
• Argentine Peso (ARS) 
• Taiwan Dollar (TWD)

These contracts are actively traded in global financial hubs like Singapore, Hong Kong, London, and New York, where participants can access liquidity and reliable pricing for these currencies.

NDFs are particularly valuable for businesses operating in countries with restricted or non-convertible currencies. They provide a practical way to manage foreign exchange risk without having to physically move money across borders, something that’s not always possible in controlled markets.

NDFs are best suited for:

• Companies with exposure to restricted currencies, such as firms dealing with clients or vendors in countries like China, India, or Brazil.
• Businesses needing to hedge future cash flows without physical transfer, for example, those expecting payments in a restricted currency but reporting in USD or EUR.
• Finance teams seeking certainty on cash flow value for budgeting, enabling better financial forecasting by locking in FX rates ahead of time.

To paint a clear picture, here’s an example scenario of how a company can use an NDF to manage future currency exposure.

A wine importer based in Hong Kong is set to receive PHP 20,000,000 from a customer in the Philippines in three months. Since the Philippine Peso is a restricted currency, the company can’t use a standard deliverable forward to hedge the risk of currency fluctuations.

To manage this exposure, the importer enters into a Non-Deliverable Forward (NDF) contract with the following terms:

• Notional: USD equivalent of PHP 20,000,000
• Forward Rate: 56.2 (USD/PHP)
• Fixing Date: 3 months from today
• Settlement: Cash difference paid in USD

Outcome at Maturity

This setup allows the wine importer to protect the USD value of its future revenue without dealing with physical PHP conversion. Depending on where the spot rate lands on the fixing date, the company either pays or receives the difference, keeping its cash flow predictable despite currency restrictions.

NDFs offer a practical solution for managing currency exposure in restricted markets. Here are some of the key advantages businesses gain by using them:

• No need to move restricted local currency
• Simple cash settlement in major currencies
• Protection against adverse FX movements and short-term currency volatility
• Useful for hedging revenues, payables, or investments in emerging markets

Like any financial instrument, NDFs come with their own set of risks. It’s important to understand these factors before entering into a contract.

• Cash settlement only: No actual delivery of currency
• Exposure to counterparty risk
• Liquidity may be limited for some exotic currencies
• Fixing rates are determined by official or third-party sources, which may vary
• Subject to market risk from fluctuations in short-term exchange rates and broader economic shifts

NDFs provide a valuable way to manage currency risk in markets with capital controls or convertibility issues. By locking in exchange rates without moving funds, they offer a flexible and compliant hedging solution. For businesses with exposure in emerging markets, understanding and using NDFs can reduce uncertainty and support financial stability.