Using NDF to Learn What is Forex Trading?

Do you wish to know more about 'What is Forex Trading? In this article, we shall be explaining another type of currency which is associated with forwards and forex trading. This forex trading terminology is called Non Delivered Forward or NDF. To help you further your understanding of its relationship to the forex market and economy,  we will give you a definition including its features and which countries usually utilize such instruments.

Defining Non Delivered Forwards

This financial instrument is regarded as a  short term cash-settled forward that is agreed upon by two parties.  These two parties typically involve the NDF itself and the spot rate.  In most cases,  the involved parties do not exchange notional amounts.  Instead,  they usually settle the agreement using US dollar cash. In other terms,  NDFs are also called Forward Contracts for Difference (FCDs).

What Consists an NDF?

Non delivered forwards usually have 5 main features in order to be regarded as a legit NDF.  These features include the following:

1.Notional Value

a notional value or amount is known as the agreed face value of the NDf which is defined by the two parties who are involved in the agreement.

2. Spot Rate

This is the value that is provided by the central bank. Similar to other currencies,  NDF spot rates should always be up-to-date. 

3. Non Deliverable Forwards Value

This value or rate is the honest value or rate of the currency under NDF which is being used or utilized on the day of the transaction.

4. Settlement Schedule

This is the scheduled date where the two parties involved in the NDF decide to make a difference between the exchange rates.  With this agreement,  one party must express his intention to set the schedule for the payment or settlement while the other is to accept the said payment on the agreed date. take note that the payment to the NDF should be tendered in cash.

5. Fixing Date

fixing is  the term used to refer to the manner of comparing the spot rate and the NDF rate. During the fixing date,  both parties meet to decide when they should compare the NDF and the spot rate which is going to help them determine the fixed rate for the instrument.

Advantage of NDF

1. Availability

Since PDF are used in countries where forwards are not allowed as a form of financial instrument, an PDF trader is guaranteed of various options using a wide range of currency that can be used to lessen foreign exchange risks in areas where physical delivery is not permitted.

2. Same function as forwards

Similar to forwards, NDFs are also financial instruments that can be utilized if you are aware of the ins and outs of 'What is Forex Trading.' The only difference is NDFs ability to be utilized even without physical delivery of an underlying currency pair.

3. It can be personalized

NDFs have the ability to be tailored according to the agreeing party's choice of fixing date and notional amount.

Conclusion:

This lesson is aimed to help you realize that NDFs are designed to be utilized as an alternative financial instrument.  It offers several advantages but you should also know that NDFs also have its drawbacks which is also something that you have to take note of.

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