Forex NDF (non-deliverable forward) is a cash-settled, short-term forward contract on a thinly traded or non-convertible foreign currency such as Taiwan Dollar (TWD), Korean Won (KRW), Chinese Yuan (CNY), Brazilian Real (BRL), and Argentinean Pesos (ARS); the profit or loss at the settlement date of forex NDF is calculated by taking the difference between the pre-agreed upon exchange rate and the spot rate at the time of settlement, for an agreed upon notional amount of funds.
Forex NDF is normally quoted and settled in US dollars and forex NDF is usually used by corporations seeking to hedge exposure to foreign currencies that are not traded internationally such as Taiwan Dollar (TWD), Korean Won (KRW), Chinese Yuan (CNY) etc. Forex NDF is also prevalent in some countries where forward FX trading has been banned by the government (usually as a way to prevent exchange rate volatility).
Then how does forex NDF work? Here is an example:
Company A imports coffee from a Brazilian supplier at a total price of BRL 3 million. Company A is invoiced and the payment is due in 120 days (t+120). The Brazilian supplier wishes to get payment in US dollars in an amount equivalent to BRL 3 million. Thus company A is exposed to exchange rate fluctuations because the payment date is in 120 days.
No comments:
Post a Comment