Hedging solution for non-convertible currencies
What you should know about non-deliverable forwards
An NDF is an efficient way to hedge a foreign exchange (FX)
exposure against non-convertible currencies such as the
Argentinian peso, Taiwanese dollar, Korean won, etc. It is
conceptually similar to a forward transaction with the difference
that there is no settlement in the non-convertible currency.
Instead, the whole transaction is settled in the convertible
currency such as USD, EUR, or CHF.
As for a forward transaction, an NDF is fixed for an agreed
amount (of the non-convertible currency), on a specific due date,
and at a defined forward rate. At maturity, the forward rate is
compared against the reference rate of that day. This might be
the daily rate fixed by the central bank in question, or an average
rate published by several banks. The difference between the
pre-agreed forward rate and the fixing rate is settled in the
convertible currency on your account on the due date. Therefore,
you will either pay or receive the difference.
How they work
NDFs are particularly suitable for clients who operate in
countries with a non-convertible currency. They make it possible
to hedge the exchange rate risk.
As with a forward transaction, the costs of an NDF correspond
to the interest differential between the two currencies. Nonconvertible currencies often have high interest rates. For this
reason, hedging in these countries may be more expensive than
in countries with lower interest rates.
An OTC trading limit is required for this product.
Possible risk
Depending on the fixing rate at the expiry of the NDF, a loss may
occur in the convertible currency.
What currencies are suitable for NDFs?
NDFs may be concluded in the currencies of the following
countries (list not necessarily exhaustive):
