Forex Market

Relationship between FX forwards and NDFs

Learning Outcome

What Is an FX Forward?

An FX Forward is a contract between two parties — usually a bank and a corporate — to buy or sell a specific amount of one currency against another at a pre-agreed rate, on a specific future date.

The rate agreed today is called the Forward Rate. On the settlement date, both parties physically exchange the agreed currencies. This is called Deliverable Forward or Physical Settlement

What Is a Non-Deliverable Forward (NDF)?

A Non-Deliverable Forward (NDF) is a forward contract used for currencies that cannot be freely delivered outside their home country. Instead of exchanging both currencies on the settlement date, only the profit or loss (the difference between the agreed forward rate and the actual market rate on that date) is settled — in a freely convertible currency, usually USD.

Because only a net cash amount moves (not the restricted currency itself), NDFs are traded offshore meaning outside the jurisdiction of the restricted country's central bank.

FX Forward vs NDF

Worked Examples

Example 1 — Indian Exporter Using an FX Forward (Onshore)

Example 2 — Foreign Fund Using an NDF (Offshore)

Practical Applications

Both instruments serve different participants with different needs. The table below summarises who uses what and why

Summary

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Which regulator controls Indian stock market activities?