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In finance, a non-deliverable forward (NDF) is an outright forward or futures contract in which counterparties settle the difference between the contracted NDF price or rate and the prevailing spot price or rate on an agreed notional amount. It is used in various markets such as foreign exchange and commodities.
In finance, a forward contract, or simply a forward, is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on in the contract, making it a type of derivative instrument.
For a trade with time to expiry of z years, the expiry date is found by first calculating the spot date, then moving forward z years from the spot date to the delivery date. If the delivery date is a non-business day or a US holiday, move forward until an acceptable delivery date is found.
Both forward and spot rates tend to act as navigation tools in the diverse world of investments. Primarily, the forward rate indicates forecasted interest rates, while the spot rate provides the ...
Here, the forward price represents the expected future value of the underlying discounted at the risk-free rate—as any deviation from the theoretical price will afford investors a riskless profit opportunity and should be arbitraged away. We define the forward price to be the strike K such that the contract has 0 value at the present time.
Non-deliverable Cross-Currency Swap (NDXCS or NDS): similar to a regular XCS, except that payments in one of the currencies are settled in another currency using the prevailing FX spot rate. NDS are usually used in emerging markets where the currency is illiquid, subject to exchange restrictions, or even non-convertible.
For example, to calculate the 6-month forward premium or discount for the euro versus the dollar deliverable in 30 days, given a spot rate quote of $1.2238/€ and a 6-month forward rate quote of $1.2260/€: = = = %
This forward contract is free, and, presuming the expected cash arrives, exactly matches the firm's exposure, perfectly hedging their FX risk. If the cash flow is uncertain, a forward FX contract exposes the firm to FX risk in the opposite direction, in the case that the expected USD cash is not received, typically making an option a better choice.