What is a Non-deliverable forward (NDF): Finalto’s Antony Parsons explains

Rick Steves

“Certain assets are more difficult to deliver than others […] By utilizing cash-settled contracts, these otherwise inaccessible forex pairs can be seamlessly integrated into a portfolio. This principle can also be applied to regions with currency controls, making NDFs a valuable tool for acting upon or hedging less liquid opportunities.”

Staying ahead of the curve means constantly exploring new opportunities and asset classes. One such asset class that has been gaining traction in recent times is Non-Deliverable Forwards (NDFs).

These financial instruments offer a unique solution to liquidity issues in less accessible currency pairs. To shed light on what NDFs are and why they are becoming increasingly significant, Finalto sat down with Antony Parsons, Head of Liquidity at Finalto.

Finalto is a market leader in financial services. Its comprehensive B2B offering enables retail brokers to license its proprietary trading platform, CRM software, back-office, and business-intelligence systems, and use Finalto’s exclusive liquidity technology providing retail brokers with multi-asset execution, prime brokerage services, liquidity, and trading tools.

Understanding NDFs: A cash-settled alternative

An NDF, or Non-Deliverable Forward, is a specialized type of forward contract used primarily in foreign exchange markets. What sets NDFs apart from traditional forwards is how they are settled.

When trading an NDF, counterparties agree to settle the difference between the contracted NDF rate and the prevailing spot exchange rate on a specified future date. Crucially, NDF contracts are settled in cash rather than through the physical delivery of the underlying currency.

Antony Parsons explains the significance of this cash settlement feature, stating, “Certain assets are more difficult to deliver than others. For instance, major currency pairs like EUR/USD are highly deliverable because of the ample liquidity available in both the Euro and US Dollar markets. However, when dealing with currency pairs like USD/BRL, where liquidity for the Brazilian Real is scarcer, NDFs become a viable solution. By utilizing cash-settled contracts, these otherwise inaccessible forex pairs can be seamlessly integrated into a portfolio. This principle can also be applied to regions with currency controls, making NDFs a valuable tool for acting upon or hedging less liquid opportunities.”

Rising demand for NDFs: A hedging and speculation tool

As for the current market demand for NDFs, Antony Parsons notes a growing interest, albeit with a twist. “In a broad sense, yes, there is increasing interest in NDFs. However, it’s important to recognize that much of this demand comes from hedging activities rather than pure speculation. Companies with foreign offices, for example, can utilize NDFs to hedge against exchange rate risk when expanding into new markets. Yet, there’s still a considerable demand from those looking to speculate. NDFs can be quite volatile in certain currency pairs, making them an intriguing addition to a well-managed portfolio.”

So, is hedging the primary use for NDFs, or do they serve as tools for speculation as well? According to Antony Parsons, it’s a bit of both. “For hedging, let’s revisit the example of the Brazilian Real. Suppose a company has an office in Brazil and needs to pay salaries in Brazilian currency. Their financial well-being is closely tied to the fluctuations in the Brazilian Real. To mitigate this risk, they can hedge the difference between the Brazilian Real and another currency using NDFs. Since NDFs essentially function as forward contracts, they offer a convenient way to hedge against the volatility of less readily available currencies.”

He continues, “Speculation is another dimension where NDFs shine. While you can acquire Brazilian Real within Brazil’s economy, trading it outside of that context can be challenging due to limited liquidity. NDFs bridge this gap, allowing brokers and traders to speculate on these instruments without the need for access to the physical, deliverable currency.”

NDFs have emerged as a versatile asset class offering solutions to liquidity challenges in the foreign exchange market. Whether used for hedging against currency risk or as a tool for speculation, NDFs have the potential to enhance portfolio strategies and open doors to new and exciting opportunities. As the financial landscape continues to evolve, staying informed about innovative instruments like NDFs is crucial for market participants seeking to navigate the ever-changing terrain of global finance.

Read this next

Digital Assets

Binance to phase out BUSD support in two weeks

Binance has announced its plans to gradually phase out support for its native stablecoin, BUSD (Binance USD) by December 15, 2023. This move comes after Paxos, the issuer of BUSD, decided to stop minting new tokens.


Binance Labs invests $3.15M in Open Campus to advance Web3 education

Binance Labs, the venture capital arm of the cryptocurrency giant Binance, has invested $3.15 million in Web3 education platform Open Campus.

Institutional FX

Brighty App unveils EU B2B payment platform amidst exploding market

Brighty App is set to launch its European B2B platform, Brighty Business, this month. This platform is geared towards improving how businesses handle their financial operations, especially in the digital banking and cryptocurrency domains.

Digital Assets

Celsius’ withdrawal process slowed by overwhelming demand

Bankrupt crypto lender Celsius is taking steps to allow certain customers to withdraw their funds. However, some users have reported difficulties in logging in to process their withdrawals, as indicated by posts on various social media platforms.

Digital Assets

Cristiano Ronaldo hit with $1 billion lawsuit over Binance NFTs

Cristiano Ronaldo, the renowned footballer, is facing a class-action lawsuit in the United States over his promotion of Binance, the world’s largest cryptocurrency exchange.

Digital Assets

Zipmex creditors offered 3.35 cents on the dollar payout

Zipmex, a Thai crypto exchange grappling with financial difficulties, has proposed a restructuring plan to repay its creditors.

Digital Assets

FSB warns of risks posed by multifunction crypto-asset intermediaries

The report on Multifunction Crypto-Asset Intermediaries (MCIs) provides an in-depth analysis of these entities which combine various crypto-asset services and products, typically centering around a trading platform. These services can include proprietary trading, investment functions, issuance, promotion, and distribution of crypto-assets, including stablecoins.

Retail FX

Indonesia launches PosPay Gold: a Sharia-compliant physical gold trading app powered by Kinesis

“Partnerships like the just realized POSPay Gold in Indonesia will revolutionize the global monetary system and economy and will enable citizens to have access to trading in gold while being sharia-compliant and having the freedom to realize their everyday financial needs.”

Retail FX

Webull acquires Flink to enter Mexican market ahead of further LATAM expansion

“Given our success in the United States and the establishment of our global headquarters in St. Petersburg, Florida, the Mexican market is a natural next step in our efforts to democratize finance for investors across the world. We anticipate using Mexico as a springboard into greater Latin and South America, where we believe there is a strong desire among retail investors to access global markets.”