NDF is an efficient method of managing FX exposures against non-convertible currencies since there is no actual exchange of principal funds.
- Non-Deliverable Forwards (NDFs) are conceptually similar to FX forward contracts; the difference is that they do not require physical delivery of the non-convertible currency.
- A (notional) principal amount, forward exchange rate and forward date are all agreed at the contract's inception. At maturity, the difference between the contracted forward rate and the prevailing spot rate is settled in the convertible currency.
- NDFs are cash-settled currency forwards which provide an offshore mechanism to hedge currencies which were previously considered "unhedgeable"; either due to emerging markets suffering from illiquidity or regulatory/settlement constraints.