A non-deliverable forward, or NDF, settles a contractual exchange-rate difference without exchanging both currency principals. The notional, rate quotation, fixing, settlement currency and dates determine the calculation. A cash-settled product in a retail terminal is not automatically an NDF.

What is settled?

A deliverable currency forward exchanges agreed amounts on the contractual date. An NDF instead pays a calculated difference on an agreed notional. The BIS definition, Key terms, item 20 describes that distinction; it does not establish a universal minimum ticket, settlement currency or formula for every quotation convention.

The structure can be useful where currency delivery is restricted or inconvenient. It does not itself waive applicable law or guarantee a complete hedge. Cash settlement still requires payment in the agreed settlement currency.

A model with explicit units

Consider a hypothetical exporter expecting 1,000,000 units of a fictional local currency, LCU. The contract rate K is 5 LCU per USD, giving a target value of 200,000 USD. Define the exporter's NDF settlement as N × (1/K − 1/S), where N is the LCU notional and S is the agreed fixing in LCU per USD. Positive means dollars received; negative means dollars paid.

At a fixing of 5.5 LCU per USDUSD amount
Receipt exchanged at that same rate: 1,000,000 / 5.5181,818.18
NDF: 1,000,000 × (1/5 − 1/5.5)18,181.82
Total before costs200,000.00

This specified model assumes the full receipt arrives on time, conversion is available at the fixing and all parties perform. An actual contract may use another notional currency or settlement convention. Do not move this formula to a reversed quotation without checking its units and sign.

Illustrative model · how it works

A hedge can exceed the cash flow received

Use a separate hypothetical exporter receiving a local currency labelled LCU. Its unchanged NDF notional N is 1,000,000 LCU, the contract rate K is 5 LCU per USD, and the actual receipt falls to 800,000 LCU. Define the exporter's USD settlement as N × (1/K − 1/S), positive when the exporter receives dollars and negative when it pays. Assume the receipt is exchanged exactly at the agreed fixing S on the same date.

Scroll sideways to see the full diagram

A hedge can exceed the cash flow receivedThe 1,000,000 LCU NDF notional exceeds the actual 800,000 LCU receipt by 200,000 LCU. At a fixing of 5.5 LCU per USD, the converted receipt plus NDF settlement totals 163,636.36 USD; at 4.5, it totals 155,555.56 USD. The target for 800,000 LCU at a rate of 5 is 160,000 USD.NDF notional: 1,000,000 LCUActual receipt: 800,000 LCUExcess notional: 200,000 LCUFixing = 5.5 LCU per USD163,636.36USD in total+3,636.36 USD vs targetFixing = 4.5 LCU per USD155,555.56USD in total−4,444.44 USD vs targetTarget: 800,000 LCU ÷ 5 =160,000 USD

Two hypothetical alternative fixings, with aligned dates and currency conversion exactly at the fixing, excluding costs. The formula explicitly uses an LCU notional and USD settlement; it is not a universal quotation convention or an instruction to amend a contract. Settlement on an agreed notional: BIS RMA20, Key terms, item 20.

Each total is 800,000/S + 1,000,000 × (1/5 − 1/S). The NDF settles on its agreed notional, which does not automatically shrink with the receipt. The excess can produce a positive or negative deviation from the target for the amount actually received.

Why delivery constraints matter

The existence of an NDF market does not mean a currency is wholly non-convertible or that all participants face identical restrictions. Market access depends on the country, participant, transaction and current rules. A forward turnover total also cannot be treated as an NDF total: NDFs are a subset of the wider forward market.

To understand a specific instrument, read its confirmation and governing terms. Avoid replacing them with an undated ranking of currencies or a claim that one settlement form is always necessary.

Check the yuan quotation and contract

The labels CNY and CNH in offshore yuan trading distinguish market contexts for renminbi quotations. That label alone does not establish whether a product delivers currency, settles a difference or is a CFD. Check the instrument description, fixing source, settlement currency and rules applicable to your account.

Nor is an offshore quote necessarily interchangeable with an onshore fixing or a conversion rate offered by your bank. A mismatch between the reference and the rate actually available can leave part of the exposure unhedged.

Match the instrument to the objective

An NDF intended to hedge a currency receipt has a different purpose from an emerging-market equity or bond fund. A fund can add asset-price and issuer risks; its trading currency alone does not tell you its underlying currency exposure.

Compare the cash-flow structures in FX swaps and currency options, then return to forex basics if the pair's quotation is unclear. Availability and suitability require a separate product-specific check.

What can leave the hedge incomplete?

If the fixing remains 5.5 but the actual conversion rate is 5.6 LCU per USD, the receipt converts to 178,571.43 USD. Add the unchanged 18,181.82 USD NDF payment: the total is 196,753.25 USD, about 3,246.75 USD below the target before costs. Only the conversion rate changed.

A different receipt amount, payment date or unavailable fixing creates other problems. Counterparty performance, collateral, early close-out costs and the contract's fallback provisions also need attention. Net settlement does not make credit risk automatically greater than in every deliverable contract.

Read the settlement instructions

Record the notional and its currency, quotation units, agreed contract rate, fixing source and date, settlement date, paying side and fallback clauses. Then test both a higher and a lower fixing. Keep the actual currency receipt or payment separate from the derivative settlement.

The diagram below changes the amount received while leaving the NDF unchanged. Its point is that a contract does not automatically shrink when the underlying cash flow falls.