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A non-deliverable forward (NDF) is an outright forward 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.

NDFs are prevalent in some countries where forward FX trading has been banned by the government (usually as a means to prevent exchange rate volatility). The NDF market is an over the counter (OTC) market and trades using the following standard terms / conventions.

The Notional Amount

This is the "face value" of the NDF, which is agreed between the two counterparties. It should again be noted that there is never any intention to exchange the notional amounts in the two currencies.

The Fixing Date

This is the day and time whereby the comparison between the NDF rate and the prevailing spot rate is made.

The Settlement (or Delivery) Date

This is the day when the difference is paid or received. Depending on the currencies dealt, the fixing date is one or two good business days before the settlement date.

The Contracted NDF Rate

This is the rate agreed between the two counterparties on the transaction date, and is essentially the outright forward rate of the currencies dealt.

The Prevailing Spot Rate

The fixing spot rate on the fixing date is usually provided by the central bank, and is commonly calculated by calling a number of dealers in the market for a quote at a specified time of day, and taking the average. The exact method of determining the fixing rate will be agreed when a trade is initiated, but most NDF markets have their own conventions.

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