Non-deliverable forward (NDF)

A way to hedge foreign exchange exposures in emerging market currencies where a conventional forward market does not exist or is restricted. Governments of emerging countries often impose restrictions on the type of business that may be undertaken by offshore entities within the local financial market. Like a conventional forward, a non-deliverable forward makes it possible to hedge future currency exposure. They require a cash settlement depending on the outcome. It is settled at maturity for the difference in the spot rate and the NDF rate in the hard currency only - typically US Dollars. The transaction takes place offshore from the emerging market.